MACD exponential smoothing moving average

1. Introduction

Moving average convergence divergence indicator is based on two exponential moving averages(shorter/fast and longer/slow EMA) to calculate the difference(DIF) between the two, then find the DIF N-day smooth moving average trend DEA(Convergence/Divergence) to determine if it is the right time to buy or sell a stock.


2. Calculation formula

2.1 Average index (DI) = (highest price + lowest price + 2 * closing price)/4

2.2 Exponentially smoothed moving average (EMA) = EMA of the previous day + 2/(1 + moving average days) * (average index of the day-EMA of the previous day)

2.3 Difference (DIF) = 12-day EMA-26-day EMA

2.4 MACD = MACD of the previous day + 2/(1+ moving average days) * (DIF-MACD of the previous day)


3. Application

3.1 MACD and DIF are both positive, which can be regarded as a long market.

3.2 MACD and DIF are both negative and can be regarded as a short market.

3.3 DIF breaks through MACD upwards,buying signal.

3.4 DIF fell below the MACD, sell signal.

3.5 DIF value turns from negative to positive, and crosses MACD, buying signal.

3.6 DIF value changes from positive to negative, and it breaks through the MACD, a sell signal.

3.7 If MACD and DIF are both positive, and DIF breaks MACD upwards, this is a buyer's market and it is more advantageousto go long.

3.8 If MACD and DIF are both negative, and DIF falls below MACD, this is a seller's market and it is more advantageous to go short.

3.9 When the DIF and the broader market index are diverging, if the stock price continuously hits lowerlows, but the DIF value does not hit a lowerlow, this is a "positive divergence" trend, which is an opportunity to buy; on the contrary, if the stock price continuously hits higherhighswhilethe DIF value has not made a higherhigh, this is a "negative divergence" trend, which is a time to sell.


4. Features

4.1 MACD is capable of detectingthe obvious rising trends and momentum in general, and it could be utilized a potential reversal after a steep decline in a stock. MACD is a very good analysis tool in testing a majortrend inthe stock market.

4.2 MACD has unique analytical capabilities for medium and long-term investment strategies, and it is quite accurate to confirm the fluctuations of large-scaleswings. The periodicity of MACD fluctuations can help wave theory researchers to confirm the fluctuations of the trend.

4.3 52% of the time,by reducingthe false breakthrough buying and selling signal of moving average line, MACD can reduce the number of invalid transactions and improve profitability.

4.4 After a long period of increasing in price, MACD and DIF are often "entangled" and the buying signal becomes worse, so it is not suitable touse it at this time.