Moving averages are trend-following indicators that don’t work well in choppy markets. Oscillators tend to be more responsive to that kind of trading behavior. The moving average convergence/ divergence indicator combines those characteristics. | TECHNICAL ANALYSIS THE MACD A COMBO OF INDICATORS FOR THE BEST OF BOTH WORLDS By Wayne A. Thorp Moving averages are trend-following indicators that don t work well in choppy markets. Oscillators tend to be more responsive to that kind of trading behavior. The moving average convergence divergence indicator combines those characteristics. Moving averages are the easiest and most popular technical indicators. But they are trend-following indicators that work best in strong trending periods in fact moving average trading systems tend to lose money during periods of choppy trading. Since markets and individual securities will at some point enter a period of sideways or choppy trading where prices move up and down without any sense of direction you may want to turn to an indicator that is more sensitive and responsive to that kind of trading behavior. Oscillators fit this bill. Technicians use oscillators in a variety of ways to determine overbought and oversold conditions to determine the momentum of a security or index as well as to identify divergences between price and the indicator. This article focuses on one indicator that combines the best of both worlds the trend-following characteristics of moving averages and oscillator characteristics that help indicate whether a security is overbought or oversold and that help pinpoint potential divergences. The indicator is called moving average convergence divergence more commonly known as MACD. CALCULATING THE MACD The MACD is a trend-following momentum indicator developed by Gerald Appel that shows the relationship between two moving averages of price normally the close . The MACD line is calculated by taking the difference between a longer-period and shorter-period exponential moving average. It is the interaction of these two moving averages that gives the indicator its name. Over time the two moving averages are constantly converging and diverging. Exponential averages are used because they respond more quickly to .
