Posted by forex at 8:27 AM
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1. Compute the 26 day exponential moving average of the stock, bond, equity, futures, or currency under study. The exponential moving average is a manipulation of a moving average by adjusting the weight in favor of the most recent data. Information on computing an exponential moving average may be found in Resources. Any spreadsheet program also contains an exponential function.
2. Compute the 12 day exponential moving average of the stock, bond,equity, futures or currency under study. Then subtract the 26 day result from the 12 day average. Plot the result.
3. Create a 9-day moving average and plot as a dotted line. This is called the signal line. Use the signal line as a buy and sell indicator as it crosses above and below the 'smoothed' difference of averages above. In formula form, we have created (MACD(12)-MACD(26)) -(9,EMA).
4. Note that the largest gains come when all the indicators are above the zero line. This implies that all the movements are moving in a positive manner. Trading signals below the zero line are usually weaker and should be avoided.
5. Remember that the MACD is a short to intermediate term indicator. It was not meant to be manipulated by using other moving averages other than the 26,12 and 9 periods. Do not invest using long term moving averages unless they are converted to weeks. Day traders can use minute or 5 minute prices instead of days.