|  OCT 1991

The MACD Indicator Revisited by John F. Ehlers

The MACD Indicator Revisited by John F. Ehlers The moving average convergence-divergence (or MACD, as it is familiarly known), one of the more popular technical indicators, was invented by technician Gerald Appel to trade the 26-week and 13-week cycles of the stock market. Commodity traders often use daily data with MACD but still use 26-period and 13-period exponential moving averages (EMA) in the analysis. The implication is that there are 26- and 13-day cycles in commodity markets. Beliefs such as this (for example, that only a 14-day relative strength index is correct) incite my curiosity enough to make me do some research. The basic premise by which I work is that the market is always changing and your trading strategy and indicator parameters must change to fit the current market conditions. Specifically, I have studied the Standard & Poor's 500 and have found an unusual combination of MACD parameters that produces good profits a surprisingly high percentage of the time. This unique use of the MACD indicator can be applied to almost any market at one time or another. THE TRADITIONAL MACD A 26-day EMA is the first moving average and a 13-day EMA is the second moving average in a traditional MACD. The MACD line is formed by subtracting the long (first) moving average from the short (second) moving average. A signal line is formed by smoothing the MACD line with a third EMA. The third moving average is usually a 10-day EMA. For the sake of simplicity, causing only a small amount of distortion, I use the third EMA to be equal in length to the second EMA.

by John F. Ehlers