MACD
Momentum from two simple averages: the MACD line, its signal line, and the histogram between them.
This MACD is built from simple averages of closing prices. At defaults the MACD line is the 12-bar average minus the 26-bar average, the signal line is the 9-bar average of the MACD line, and the histogram is the MACD line minus the signal. All three are in price dollars and centred on zero.
How to read it
- All three values share one pane below the price, centred on zero, in the same dollars as the price.
- The MACD line above zero means the fast average is above the slow one; it crosses zero when the two averages cross.
- The MACD line crossing its signal line is the classic MACD signal; the histogram crosses zero on the same bar.
- Judge the histogram against its typical range: on SPY one-minute bars at defaults, 90% of values fell between about -0.16 and +0.16.
What it outputs
- MACD line
- The fast simple average minus the slow one, in dollars. Above zero while the fast average is above the slow one.
- Signal line
- The simple average of the MACD line over the signal window. It trails the MACD line; their crossings are the usual MACD signals.
- Histogram
- The MACD line minus its signal, in dollars. On the sample it ran from about -0.86 to +0.84, and 90% of bars fell between -0.16 and +0.16.
Settings
- Fast
- Bars in the fast average. Raising it pulls the fast line toward the slow one, so the histogram shrinks; lowering it widens the gap and makes the histogram swing harder on each move.
- Slow
- Bars in the slow average. Raising it makes the slow line lag further, so the histogram grows in a sustained trend and the warm-up gets longer; lowering it pulls the slow line toward the fast one, so the histogram flattens toward zero.
- Signal
- Bars averaged into the signal line. Raising it lags the signal further, so the histogram grows in sustained moves and crosses zero less often; lowering it tightens the signal, so the histogram hugs zero and flips more often.
Pitfalls
- It uses plain means, not the exponential averages of a standard MACD, so each bar in a window counts equally and values will not match a charting package's MACD.
- A histogram at zero means the MACD line equals its signal, not that the two price averages are level; read the MACD line for that.
- The first few dozen bars stay blank at defaults: the slow average needs 26 closes, and the signal needs 9 MACD values after that.