In 1979 Gerald Appel improved the price oscillator, discussed in Chapter 3, by adding a moving average of the price oscillator itself. Buy signals came when the price oscillator moved above the second moving average, called a trigger line. He called the new technical oscillator the Moving Average Convergence Divergence Oscillator, or MACD (pronounced M-A-C-D, or Mac-D). Buy signals are generated when the
price oscillator goes above the trigger line, and sell signals come when the price oscillator falls below the trigger line.
Figure 4-1 shows the addition of the trigger line to the price oscillator that was first plotted in Figure 3-13, The two combined oscillators make up the MACD. Note that this MACD is much faster to signal entrances into upward trends and also much quicker to get out of losing trades. Prove this for yourself by comparing Figures 3-13 and 4-1.
Appel studied the MACD at great length and has made a series of recommendations, some of which can be summarized as follows:
1. Establish the trend of the security by determining whether the 50-unit moving average has a positive or negative slope, If positive, use a fast MACD to get into the trade; If negative, use a slow MACD to get into the trade.
2. The parameters for a fast MACD buy would be to use 6-19 units for the price-oscillator portion and a 6-unit trigger.
3. The parameters for a slow MACD buy would be to use 13-26 units for the dual moving-average portion and a 9-unit trigger.
4. The sell signal for either the fast or slow MACD entry would be a 19-39-unit dual moving average and a 9-unit trigger.
5. Divergences (discussed in the next section of this chapter) between the MACD and the price of the security increases the strength of the buy or sell signals.
6. Once a sell signal has occurred, the trade shouLd not be reentered until the MACD has returned to below "zero," even if a buy signal is received.
Was this article helpful?