The Moving Average Convergence/Divergence Indicator or MACD has long been revered as the most accurate indicator. As a momentum indicator, the MACD tells us if the price movement is trending as well as the strength and direction of the trend. But more importantly, when use in conjunction with a price chart it has the uncanny ability to identify tops and bottoms with almost perfect accuracy. Of course one must learn to speak its subtle language.
The MACD can be used with any time frame from a 15 minute price chart to a monthly price chart. By fully understanding the MACD, a trader or investor can develop an excellent trading or investing plan. What’s more, this indicator works for all price charts I have studied, from stocks to futures to currencies. It is not necessary to know how this indicator is computed. You only need to know how to use it properly.
The MACD is normally comprised of 2 lines, the fast line and the slow line. I will refer to the slow line as the signal line. At times the indicator will include a “histogram” or bar graph representing the distance between the 2 lines. In addition, the histogram indicates which line is on top. I do not normally use the histogram and do not include it in my charting. If I cannot tell what is occurring using the 2 lines of the basic MACD, I do not trade.
The slope and relationship of these 2 lines tell us what is happening to price momentum and at times what is likely to happen in the future. Keep in mind the MACD cannot predict every price reversal but the reversals that it does forecast can be exceptionally accurate when it is taken into context with the general market. By this I mean if the Dow Jones Industrial Average, the S&P 500 and NASDAQ indexes are trending higher, a MACD “up signal” issued for an individual stock will almost always be accurate. The opposite can be said as well; in a down market a MACD “down signal” issued for a single equity is almost always correct.
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