Is the MACD an Awesome Indicator ?

How to use the MACD

A comparisson with the Awesome Oscillator.

1) What is a MACD ?

The MACD Indicator has 3 lines, so lets go one by one :

MACD = Distance between 2 Exponential Moving Averages : EMA(Fast)-EMA(Slow)

Average = an average of the MACD line : EMA(MACD,Smooth)

Diff = Distance between the MACD and its Average : MACD - Avg

That means that when the MACD crosses the zero, both moving averages are crossing.

By the sign of the MACD we can also detect if the Fast Moving Average is above or Below the Slow Moving Average. This is a method to define if the Market is going up or down.

As a comparisson, the Wiseman Awesome Oscillator does exactly the same but with SMA's instead of EMA's, and the periods are fixed to 5 & 34

The Awesome Oscillator has only one line, the equivalent to the MACD, but the MACD has another two lines :

The Avg is an exponential moving average of the MACD line, so its the smoothed version of the MACD.

This line is sometimes useful to create the EMA Crossover Signals, because with the Smooth Period we can decrease the noise, and fake signals.

The last line is the Diff, or Difference, the classic histogram.

This line is the distance between the Macd and its Average.

So, we can detect the crossover between the Macd and its Average by looking at the crosses by zero of the Diff.

This cross represents the moment when the two lines (Fast & Slow EMA's) stop moving away from each other and start coming closer together.

So, its an early signal of a possible moving average crossover

Possible Trade Setups

1) EMA(Fast) Cross EMA(Slow)

We can use the Avg of MACD(Fast, Slow, Smooth) detecting when it crosses the zero

2) MACD Pullback Continuation

This setup consists of detecting the moment when the distance between the fast and slow averages begins to increase after having been decreasing but without going below zero for a Long Signal.

Similarly, the moment when the distance between the fast and slow averages begins to increase after having been decreasing but without passing above zero are now Short Signals :

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