International Journals of Multidisciplinary Research Academy IJMRA This Professional Academy ijmra. us resides on:- ThePlanet. com Internet Services in Houston, TX, United States. by Publisher ijmra. us UGC Approved. Download Download PDF. Download Full PDF Package. Translate PDF. A GUIDE TO TECHNICAL ANALYSIS - MACD The MACD or The Moving Average Convergence Divergence was by Gerald Appel, It is one of the most popular indicators.

It is a very simple reliable Indicator. Also it is an Indicator a TA enthusiast gets introduced to first. The MACD is constructed by subtracting the longer moving average from the shorter moving average.

The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. The MACD is considered to be a momentum oscillator though it is widely used by Trend followers. The most popular formula for the MACD is the difference between the day and day exponential moving averages. I will use this standard setting and later if time permits I will try to present other combinations.

A 9-day EMA of the MACD line is used as the signal line. Chart —1 A positive MACD indicates that the shorter EMA is greater than the longer EMA indicating that momentum is positive. A rising MACD indicates the difference between the short EMA and the long EMA is increasing and in other words indicates a rising momentum. In the same way a negative MACD indicates that momentum is negative and a falling MACD indicates an increasing negative Momentum.

MA cross over or signal line crossover. The basic and the most common is the signal line cross over. Buy when the MACD line crosses above the signal line and Sell when the MACD line crosses below the signals line.

Zero Line crossover. Some use only the zero line cross over as signals. Buy when the MACD line crosses the zero line and Sell when the MACD line crosses below the zero line.

Divergences Let us see in a little detail what happens when the moving average cross over and zero line cross over occurs. Let us assume that the stock is in a downtrend and the MACD is below the zero line and below the signal line. Then when the Bullish moving average cross over MACD crossing the signal occurs the shorter EMA has started converging towards the long EMA indicating the negative momentum is waning.

It does mean that the bullishness will continue. It may or may not. So a Buy when the Bullish cross over occurs does not always produce a good trade. Now consider when the stock is in an up trend and the MACD is above zero and the signal line. If a Bearish cross over occurs MACD crossing below the signal line the short EMA has started to converge towards the long MA indicating that the positive momentum is waning.

It again does not indicate that bearishness has set in. It may be just a pull back. The stock may dip and then continue its journey upwards. When the MACD cross above the zero line it mean that the short EMA has actually crossed over the long EMA indicating that the momentum has indeed reversed from negative to positive. In the same manner the when the MACD crosses below the zero line it means the momentum has turned negative. The Bullish zero line cross over generally gives better trades.

But many times it will notice you are entry is much delayed. The Bearish zero line cross over gives too much of your profits and some time one loses money too. To summarize 1. Buying based on Bullish MA cross over does always produce good trades.

However in many cases this does helps in early entry points. How to distinguish is the problem. Combining with other Indicators may help. We will explore this later. Selling based on Bearish MA cross over may take you out of the trade too soon. Again combining with other Indicator may be of help in deciding if it is time to get out. Bullish zero line cross over generally prove profitable. The drawback again the entry point may be delayed in many cases. Selling based on Bearish zero line cross over may give away too much of your profit.

A trailing stop may help in over coming this issue Chart-2 illustrates some of these points. We will postpone discussion on this till little later. Now Let us take a deeper look at the MACD charts and try to learn a little more about the additional signals that we get and how to trade them. So far we were talking about Bullish crossover after a downtrend.

In this case the Bullish crossover occurred below the zero line. However the Bullish crossover can occur above the zero line. Such crossover occurs when the stock dips temporarily before proceeding with the up trend. Such crossovers above the zero line produce some excellent trades.

Bearish crossovers occurring above the zero line generally acts as warning signals as it indicates waning of the positive momentum. Bearish crossover below the zero line indicates strong bearishness.

For the making the discussion more interesting we will first make a system with the following criteria. BUY when there is a Bullish MA crossover. SELL when there is a Bearish MA crossover. Additionally the zero line bullish crossovers will be marked with an encircled number 1 with an arrow pointing upwards in order to indicate that the momentum has indeed reversed.

Bullish crossovers above the zero line will be marked an encircled number 2 and arrow pointing upwards indicating good trade opportunities. Similarly bearish crossover above the zero line will marked 3 and bearish crossover of the zero line will be marked 4. You will notice that the MACD line temporarily converges towards the signal line and diverge again.

We will call them DIPs. Some times the MACD line even briefly dips below the signal line and bounce back. We will call these HOOKs. The DIPs and HOOKs normally indicate brief pullbacks in the up trend and provide good add-on or pyramiding opportunities. In the same manner DIPs and HOOKs occur during the downtrend when the MACD line is below the signal line.

These indicate temporary pull up during down trends and present good shorting opportunities. We will represent the DIPs during the up trend as green dots on the Indicator and green up arrows on the charts. As with any oscillator, the MACD or MACD Histogram can provide us with possible retracement or reversal opportunities when divergence is visible.

Charts In trading the Forex and currency markets, if you are more of a position trader, in order to limit whipsawing you will find it advantageous to use the standard MACD setting of 12,26,9 or longer. As an intra-day trader, I have deviated from the default settings by shortening the moving averages 10,22,5 in order to provide a more responsive indicator. On the 4-hr. chart below, as the market began to drop we can see with Crossover A , the MACD blue line moved below the signal line red.

In Crossover B , as the price began to rise, the MACD moved above the red line. As the trend began to strengthen bullish or bearish , the MACD pair crossed the centerline. Also, take notice of the widening of the two lines. In the next chart, we have the MACD Histogram, which is contrastingly portrayed as bars. Similar to the MACD above, however, we see below that the bars of the Histogram cross the centerline as domination of one group weakens while the other group strengthens.

Having crossed the centerline into bearish territory, as the bears take greater control of the market, the bars once again began to increase in size — which is nothing more than the equivalence of the MACD lines widening. Now, when we put the two indicators together below , we can easily see the relationship between the MACD lines and the MACD Histogram.

The Histogram is on the bullish side of the zero line when the MACD blue is above the signal line red - and on the bearish side of the zero line when the MACD is below the trigger line. Now, some charting services do not permit you to display the MACD as two distinct lines.

As with the chart below, the MACD is displayed as a histogram not to be confused with the MACD Histogram and a signal line. Plainly stated, the two MACD lines have been substituted with histogram bars. Instead of two lines the MACD and signal line crossing each other, the signal line crosses the histogram.

Basically, we have the same information provided with each — just a little different perception. So, if you have a choice, what it really amounts to is from your perspective which picture clearly depicts what is happening with the price action - which version of the MACD speaks the loudest to you. And in our business a faster indicator is always a plus. Trade Example In this 4-hr.

The for applying the assumptions; for trading based on buy and sell quantitative- based analysis tries to make indicators such as signals generated by the MACD indicator.

MACD and P-SAR while the qualitative-based analysis depends on clarification of the shape of geometric patterns like Keywords— Forex, MACD, Technical analysis, Fundamental Analysis, Indicator. levels of support and resistance and double bottoms[8]. Successful TA is constructed on three basic principles [2]: I. Profitability U SING currencies in trading commenced in after breaking down the Bretton Woods agreement based on which the value of currency was underpinned by the gold Several studies support TA and revealed that TA offers significant financial signals [9].

In addition, the subsequent researchers concur with this actuality; Sweeney , ; owned by the central bank. Jegadeesh, and Lakonishok , ; Gencay , Compared to other financial markets, the Forex market has , ; Brown, Goetzmann, and Kumar ; following benefits: hour operation 5 days a week, an over- Rouwenhorst ; Neely and Weller ; Chang and the-counter market, and no fixed location.

Moreover, Forex Osler ; Lo, Mamaysky, and Wang ; Chan, market produces daily volume of USD 3. as the biggest financial market [3]. be traded [4]. According to Ding et al. In overcoming geographical restrictions as well as decreasing the during on 8 years from until for finding out whether costs of entry and transactions.

TA is profitable, they tried to evaluate USDDEM and A. Fundamental Analysis in Forex Trading USDGBP in their study. Significant movements; however, they believed that TA is more helpful than FA in forecasting the trends [21].

Seyed Hadi Mir Yazdi is Faculty of Business and Accountancy FBA ,University of Malaya UM Kuala Lumpur, Malaysia hadi. miryazdi gmail. com II. L gmail. TO the underlying security. Moreover, using Exponential Moving forecasting future price changes can use from the value of Averages EMAs , opposite to Simple Moving Averages result.

They are used to offer more information about market SMAs can remove some lags. to be applied by the investors in decision making. Indicators MACD as a momentum indicator can predict the moves in the based on their functions are sorted to four groups; trend underlying security.

MACD divergences are basic elements in indicators, volume strength indicators, volatility indicators forecasting a trend alters. A Negative Divergence signal which and momentum indicators as follow [6].

bullish momentum is waning and a change in trend from bullish to bearish is possible, too. It warns the traders to take A. Trend Indicators benefits in long positions or for violent traders setting off a Explain continue to move in one direction in the exchange short position. rate over time, called a trend. Trends have three directions; Another advantage of MACD is its application in daily, sideways, down and up. Trend indicators level variable rate weekly or monthly charts.

In this regard, the divergence and data to produce a mix of market direction. There are some convergence of two moving averages will be shown by the Trend Indicators for example Moving Averages MA , MACD. Although, the standard setting defined for the MACD MACD, P-SAR and Trend lines.

is the difference between the 12 and period EMA, any combination of moving averages can be applied. In addition, III. MACD the set of moving averages to be applied in MACD can be changed for each individual security. On the between prices and moving averages. The MACD was other hand, slower moving averages may appropriate to help introduced by Gerald Appel, in s.

It is the different smooth the data for volatile stocks. Regarding this flexibility, between exponential moving averages for 26 and 12 days. the MACD can be adjusted to the trading style, risk tolerance There is a plot of another exponential average for 9 days and objectives of the traders.

SCOPE OF THE STUDY The MACD is very simple to calculate; the difference In this study real data of trading on hourly basis and for 10 between exponential moving averages for 26 and 12 days. years from January to December is used. indicator to forecast the right time for buy and sell in the Interpretation of MACD is easy to be used for traders. In market in order to avoid lose and gain profits. this study whenever the MACD crosses the zero upward, it In this study four currencies, namely, EURUSD, GBPUSD, means there is a buy opportunity while if the MACD crosses the zero downward, there is a sell opportunity as shown in USDJPY, and USDCHF are assessed with the employment of Figure 3.

On the other hand, when the value of MACD in the MACD at which buy and sell signals are identified. The period first period hour is less than zero and in the second and third of the present study is ten years which is beginning from periods is more than zero, there is a buy signal in fourth January That is, for less than zero, there is a sell signal in fourth period.

each currency the indicator applied and examined separately. Hence, there are four currencies and one indicator and combination of them are called traders. Accordingly, each one of the four virtual traders works only with the indicator and currency. This section summarizes the research design of this study.

Figure 2 Fig. MACD advantages and Properties The data needed for this study are hourly opening, closing, One of the basic advantages of MACD is its potential to high, and low prices as well as trade volume for four incorporate the aspects of both trend and momentum in a currencies within 24 hours a day of weekdays started from single indicator.

As a trend-following indicator, MACD will January till December The data are collected from not be erroneous for too long. Applying moving averages online data base of Foreign Exchange Market on MetaTrader confirm that the indicator will finally follow the movements of software. By using unique formula in VHTS and default assumptions suggested by its inventor, the indicator was calculated. Besides, all formulas and assumptions were rechecked to avoid any mistakes in VHTS.

Furthermore, to make sure that the results are reliable, the software has been run several times. It helped us to answer the second research question: what are the hourly values of the selected indicators for each currency?. Even though the results are different for each currency, it is considerable that the circumstances of all currencies for using MACD are The data are transmitted to spreadsheets with 60, rows the same; trading with the same assumptions and for each currency.

Frequency is hourly for the time period of interpretations. Moreover, the results indicate MACD is not a An illustration of data on MetaTrader software is suitable indicator for these currencies with applying its offered in Figure 3. However, order to answer the first research question: what are the application of MACD for EURUSD is more profitable volume and open, high, low and close prices for each currency compared to other currencies since it generated pips in hourly basis for the years Although, this profit could not increase the capital due to time which it is created.

Table I demonstrates results of implementing MACD for four different pair-currencies which are shown in four separate columns. First three rows are showing produced profit that is split to two parts, sell and buy profit. The same thing is displayed for loss in second three rows.

Fourth three rows are showing the number of sell and buy Fig. Finally, the last three rows are displaying ending balance, last trading date and paid commission to broker. MetaTrader as Forex trading online software that is used In this study following assumptions are formulated to combine extensively by foreign exchange traders is one of the twenty conditions of traders.

Accordingly, each trader was significant tools used in this study. Buying and selling is prevented from any distractors of the results. The assumptions feasible via this software for traders.

Oscillating indicators are to show securities when they are overbought or oversold allowing a trader to enter at the best possible price. There are different types of momentum oscillators a trader can use, and the MACD is one of the most popular. In this guide we are going to concentrate on the MACD and how to combine with other strategies to enhance a trading strategy. NOTE: Get the Free MACD PDF Guide Download Below. Free PDF Guide: Get Your MACD Trading Strategies PDF Guide.

Not including the moving average, the MACD is the second most popular trading indicator. The Moving Average Convergence Divergence MACD is a technical indicator used to identify new trends or momentum and show the connection between the price of two moving averages.

MACD fluctuates above and below zero lines, highlighting both momentum and trend direction as the moving averages converge and divergence. Your MACD line is the day exponential moving average EMA less the day exponential moving average EMA. You can use closing price for this moving average. The 9-day EMA acts as a signal line and identifies turns because it is plotted with the indicator. For the histogram, it represents the difference between MACD and its 9-day EMA Signal Line.

If the MACD line is above its Signal Line then its positive and if the MACD line is below its Signal Line, then it is negative. You can substitute other values depending on your preference and goals.

MACD has two moving averages with different speeds. In other words, one will be quicker to react to price swing movements than the other one. If a new trend occurs, the fast line will start to cross the slower line. For this reason, the fast line will diverge or move away from the slower line, often indicating a new trend.

You can see in the image above that when the lines cross, the histogram temporarily disappears because the difference between the lines at that time is 0. If moving averages move towards each other, it means that a Convergence is occurring. On the other hand, a divergence occurs when the moving averages move away from each other. There are three different methods to interpret Moving Average Convergence Divergence MACD.

It trails average line and helps determine the turns in the MACD. It shows bullish crossover when the MACD crosses above the signal line, and a bearish crossover if it turns below the signal line.

As shown above, the chart clearly shows how a buy entered after the bullish crossover can be profitable. This strategy can also be used to manage or close a short entry. When the MACD line moves above the zero line to turn positive, then a bullish center-line crossover occurs.

This occurs when the day EMA moves above the day EMA. If the MACD line moves below the zero line to turn negative, then it is a bearish center-line. This occurs when the day EMA moves below the day EMA. This shows a point where the MACD does not follow price action and deviates.

The use of Relative Vigor Index is to measure the strength of a trend by comparing the closing price of a security to its price range and smoothing the results with EMA. In fact, the basic point of combining these tools is to match crossovers. To put it differently, if one of the indicators has a cross, you wait for a cross in the same direction as the other one.

If it occurs, you buy or sell the equity and hold your position until the MACD gives you a signal to close the position. See image below;. The chart above is the minute chart of Citigroup from December , It illustrates that there are two short and one long setups that occur after a crossover between the MACD and the RVI. The green circles are crossovers and the red circles are where the position should have been closed.

The Money Flow Index — MFI is a type of oscillator that uses both price and volume on measuring buy and sell pressure. It generates less buy and sell signals compared to other oscillators, for the reason that the money flow index requires both price movements and surge to make extreme readings.

If the MFI gives you a signal of a bearish cross over the MACD lines, there is a potential short trade. This strategy is the same way in the opposite direction for long trades. The chart above is the minute chart of Bank of America BAC. The green circle is the moment when the MFI is signaling that BAC is oversold.

After 30 minutes, the MACD has a bullish signal and is now open for a potential long position at the green circle highlighted on the MACD. You hold your position until the MACD lines cross in a bearish direction as shown in the highlighted red circle on the MACD.

To sum up, this position lets you profit an amount of 60 cents per share for about 6 hours. The use of Triple Exponential Moving Average — TEMA is to filter out volatility from conventional moving averages. It is made up of a single exponential moving average, a double exponential moving average, and a triple exponential moving average.

It can generate a trade signal when the fast line crosses the MACD and the price of a security breaks through the TEMA. You will exit positions whenever you receive contrary signals from both indicators. The image below is the minute chart of Twitter.

In its first highlighted green circle you can clearly see that you have the moment when the prices switch above the period TEMA. The MACD confirms a bullish TEMA signal on the second highlighted circle.

This is when you open your long position. As shown above, the price increases and you get your first closing signal from the MACD in about 5 hours. The price of twitter breaks the period TEMA in a bearish direction after 20 minutes and you close your position. As can be seen, it generated a profit of 75 cents per share.

The use of a Triple Exponential Average — TRIX is to be a momentum indicator. It is an oscillator used to identify oversold and overbought markets. This gives you the tighter and more secure exit strategy. You exit the market right after the trigger line breaks. This strategy is riskier because if there is a significant change in trend, you are in your position until the zero line of the TRIX is broken. It could take a while for that to happen.

The image above shows the minute chart of eBay. As shown above, the first green circle is a long signal that comes from the MACD. The second highlighted green circle is when the TRIX breaks zero and you enter a long position. On the other hand, the two red circles show contrary signals from each indicator. In the first case, the MACD gives you the option for an early exit, while in the second case, TRIX keeps you in position.

By using the first exit strategy, you would have gained a profit of 50 cents per share, while the alternative approach will generate a profit of 75 cents per share. The use of this indicator is to measure market momentum. The Awesome Oscillator calculates the difference of the 34 and 5-period Simple Moving Averages. You will enter and exit the market only when you receive a signal from the MACD, confirmed by the awesome oscillator.

Below is the minute chart of Boeing. The two highlighted green circles are signals that indicate to open a long position. The Awesome Oscillator gives you a contrary signal after going long. Yet, the MACD does not produce a bearish crossover, so you stay with your long position. The first red circle highlights when the MACD has a bearish signal. The second red circle highlights the bearish signal generated by the AO and you close your long position.

The best thing about the MACD indicator is that it brings together momentum and trends into one indicator. I hunt pips each day in the charts with price action technical analysis and indicators. My goal is to get as many pips as possible and help you understand how to use indicators and price action together successfully in your own trading.

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GBPUSD in Figure 5. PROCESS Results and discussion of the study are presented based on In most of years the buy transactions generated profit while applied methodology; that is, data collection, data assessment, sell transactions resulted loss. com Internet Services in Houston, TX, United States. So, if you have a choice, what it really amounts to is from your perspective which picture clearly depicts what is happening with the price action - which version of the MACD speaks the loudest to you. Journal of Financial and Quantitative Analysis, Also the shorting when the histogram is negative and the weekly MACD turns negative. In addition, III.

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