The Moving Average Convergence/Divergence (MACD) was invented by Gerald Appel sometime in the sixties and comes in various flavors, but most are based on a technique developed by McClellan (which he based on a technique developed by Haurlan). The technique is to take the difference between two exponential moving averages (EMA's) with different periods. This produces what's generally referred to as an oscillator. An oscillator is so named because the resulting curve swings back and forth across the zero line.
Appel's version used the difference between a 12-day EMA and a 25-day EMA to generate his primary series. This series was plotted as a solid line. Then he took a 9-day EMA of the difference and plotted that as a dotted line. The 9-day EMA trails the primary series by just a bit, and trades are signalled whenever the solid line crosses the dotted line.
The Relative Strength Index ("RSI") is a popular oscillator. It was first introduced by Welles Wilder in an article in Commodities (now known as Futures) Magazine in June, 1978.
The name "Relative Strength Index" is slightly misleading as the Relative Strength Index does not compare the relative strength of two securities, but rather the internal strength of a single security. A more appropriate name might be "Internal Strength Index."
When Wilder introduced the Relative Strength Index, he recommended using a 14-day Relative Strength Index. Since then, the 9-day and 25-day Relative Strength Indexs have also gained popularity. The fewer days used to calculate the Relative Strength Index, the more volatile the indicator.
The Relative Strength Index is a price-following oscillator that ranges between 0 and 100.
Wilder recommended using 70 and 30 and overbought and oversold levels respectively. Generally, if the RSI rises above 30 it is considered bullish for the underlying stock. Conversely, if the RSI falls below 70, it is a bearish signal.
A Moving Average is an indicator that shows the average value of a security's price over a period of time. When calculating a moving average, a mathematical analysis of the security's average value over a predetermined time period is made. As the security's price changes, its average price moves up or down.
There are several popular ways to calcuate a moving average. MetaStock for Java calculates a "simple" moving average--meaning that equal weight is given to each price over the calculation period
The most popular method of interpreting a moving average is to compare the relationship between a moving average of the security's price with the security's price itself. A buy signal is generated when the security's price rises above its moving average and a sell signal is generated when the security's price falls below its moving average.
This type of moving average trading system is not intended to get you in at the exact bottom nor out at the exact top. Rather, it is designed to keep you in line with the security's price trend by buying shortly after the security's price bottoms and selling shortly after it tops.
The critical element in a moving average is the number of time periods used in calculating the average. When using hindsight, you can always find a moving average that would have been profitable. The key is to find a moving average that will be
The most popular moving average is the 50 days and 200 days moving average.
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