Investing & Trading

MACD Strategy

By Samantha Baltodano


TL;DR:

The MACD value is found by subtracting the 26-day Exponential Moving Average (EMA) from the 12-day EMA. A 9-day EMA of the MACD line is calculated and referred to as the signal line. Trade signals occur when the MACD line crosses above the signal line (buy) or falls below it (sell).


What Is the MACD Strategy?


The MACD Strategy adds predefined moving average indicators and trade signals to the corresponding MACD study. 


The MACD line is defined as the difference between a fast and a slow moving average of a security’s close price. The length of the fast moving average should be significantly less than that of the slow one. 


In this case the default is a 26 and 12-day Exponential Moving Average (EMA).


Formula


MACD is calculated by subtracting the long-term EMA (26 days) from the short-term EMA (12 days). 


MACD = 12-day EMA - 26-day EMA


So, the MACD is a positive value when the 12-day EMA is greater than the 26-day EMA. It is a negative value when the 12-day EMA is less than the 26-day EMA.


The baseline MACD value is 0 and occurs when the 12-day EMA is equal to the 26-day EMA.  When there is a big distance between the MACD line and its baseline this indicates that the distance between the two EMAs is growing.


A 9-day EMA of the MACD line is calculated and referred to as the signal line. It serves as an indicator for trade signals. 


Trade Signals


Traders will buy a security when the MACD line crosses above the signal line. 


They will sell or short a security when the MACD line crosses below the signal line. 


When the MACD plot crosses above the signal line, an uptrend in price might be emerging.  When it falls below, a downtrend is likely emerging. 


Summary

  • The moving average convergence/divergence (MACD) line is calculated by subtracting the 26-day EMA from the 12-day EMA. The signal line is a 9-day EMA of the MACD line.
  • MACD is best used with daily periods, where the traditional setting of 26/12/9 days is the norm.
  • Trade signals occur when the MACD line crosses above the signal line (buy) or falls below it (sell).

MACD is just one of many strategies that Archaide automates. For a full list of strategies and studies available click here.


Like what you read? Check out the rest of our content!