1 on 1: - Rob Booker

1 on 1:
MACD
© 2004 W. R. Booker II & Maxwell Fox. All rights reserved forever and ever. And ever.
This ebook is part of a comprehensive program to train you to successfully trade currency. Alas,
you’ll probably lose money. We all do at first. Rob’s not liable if, based upon the nformation you
read here, you lose money, make money, turn into a woodchuck, possum, or other furry creature.
You have to work hard, study a lot, and dedicate yourself mentally. Don’t ever give up

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Moving Average Convergence Divergence (MACD)
MACK-D
MACD is arguably the most versatile indicator available on pretty much all charting
software packages. You can use it to judge momentum, or as an oscillator (for
ascertaining overbought and oversold conditions), or to slice and dice vegetables quickly
and efficiently.
But wait! There’s more!
For the purpose of this learning session, we will use the default settings of 12, 26, 9.
You may find that when you test using the MACD that you want to use alternate settings.
And that’s fine. But I have always stayed with the regular old standard settings.
The Standard MACD indicator is made up of 3 parts:
1. The MACD Line - the difference between a 12 period EMA and a 26 period
EMA.
2. The Trigger Line - a 9 period EMA of the MACD line
3. The Histogram - shows the difference between MACD line and Trigger line.
All of these lines and histogram move back and forth over a “center” or “zero” line. We
will go over an example of which line is which in an example below.
When a market is volatile, all of the parts of MACD will make wide swings on either side
of the zero line. When a market is relatively quiet, the moving averages that comprise
MACD will come together, making MACD itself consolidate on the zero line.
MACD is therefore a good indicator for measuring volatility and momentum.
Possible trading signals come from MACD in the forms of:
Line Crosses
Rollovers/Rollups
Divergences
We’ll talk about each of those in turn, but first you should know that because MACD
oscillates over a “center line,” it gives no indication of trend. It is therefore up to you as
the analyst to determine the direction of the trend and only take signals that go in its
direction. If you identify a ranging market you may take positions in either direction but
use smaller profit targets.

These are the Exponential Moving Averages (EMA) from which the MACD is created.
The Red Line is a 12 period EMA, and the Magenta Line is a 26 period EMA.
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The MACD Line is the first element. The MACD line is the measures the relative
distance between the 12 & 26 period EMAs. If the 12 is above the 26, then the MACD
line is above zero. Inversely, if the 12 is below the 26, then the MACD line is below
zero.
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Here you see the points where the EMAs are crossing each other and where the MACD
line is crossing zero.
4

Because the MACD line measures the difference between the EMAs, it always equals
zero when the EMAs are equal to each other.
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The next element of the whole MACD indicator is the slow or trigger line. It is a 9
period EMA of the MACD line.
In the same way that a moving average is made up of the average value of close prices for
a given number of time periods, the trigger line is made up of average values of the
MACD line for a given number of periods. 9 is the given number, in the case of the
default settings. If this was confusing to you, I will tell you that this was confusing to me
at first, too. I simply drilled some holes in my head, dumped out some old information,
and then re-read the paragraph above.
People tend to say that MACD is giving a “bullish signal” when the MACD line crosses
above the trigger line. In the same way, it is said to be a bearish signal when the MACD
line crosses below the trigger line.

The blue dotted vertical line marks the bullish MACD cross, and the red dotted line
marks the bearish MACD cross.
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The final piece of the MACD indicator is the histogram. The histogram measures the
relative distance between the MACD line and the Trigger line.
It is true that you can just see the difference between the MACD and the Trigger lines,
just by looking at them. But the histogram is even more visual and easy to see. It
reminds me of the bars on my cell phone. Which has nothing to do with trading, but I
thought I would say that anyway.

The histogram can be used to show divergences (in depth lesson later)
A divergence is meant to show a losing of momentum. Here we have a lower high on the
price chart is followed by a higher high, while at the same time the histogram is showing
a higher high followed by a lower high.
This is a bearish divergence. It shows that while price manages to creep higher, it does
so with less enthusiasm than when the move started and we can expect a retracement of
some kind. As we can see on the right side, a retracement is exactly what happened.
9

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I made a couple little step doohickies on the histogram to show what a rollover and rollup
might look like. The blue one showing a rollover. The green one showing a rollup.
Here is a powerful way to use the MACD:
When the histogram makes a peak, it starts to print progressively lower bars. When you
see a nice MACD rally upward followed by 2 or 3 declining bars, you are looking at the
first sign of a “rollover”. This is a bearish signal. We call it a rollover because the
MACD is rolling over, as a ball might roll over a hill. It is very quick to give a signal,
and therefore is prone to whipsaws.
To avoid whipsaws, it’s a good idea to add a couple extra criteria. An
overbought/Oversold indicator would help (like Stochastic, RSI, or CCI). Trend

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determination would also help. Waiting for the high or low of your signal candle to be
broken could also help.
What did we learn?
• The MACD indicator is made up of the MACD line, the trigger line, and the
histogram.
• The MACD indicator is vast in its range of analysis functions, yet it begins with
only 2 moving averages.
• MACD can be a powerful place to start a technical system.