MACD) is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. Below we show you the formula, an explanation, together with examples of usage.
The most popular formula for the MACD is the difference between a security’s 26-day and 12-day Exponential Moving Averages aka EMA.
Using shorter moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a slower indicator thereby becoming less sensitive to noise.
The primary benefit of MACD is that it incorporates aspects of both momentum and trend in one indicator. As a trend-following indicator, it will not be wrong for very long. The use of MA ensures that the indicator will eventually follow the movements of the underlying security. By using EMAs, as opposed to SMAs, some of the lag has been taken out.
The MACD Formula
The formula is very simple. The following is the formula for calculating the MACD (Moving Average Convergence Divergence):
MACDt = EMA1 - EMA2EMA1 and EMA2 are exponential moving averages at period t with different smoothing factors.
To be continued.