A:

In technical analysis, it is common to see a series of numbers following a given technical indicator, usually in brackets. These numbers are the parameters used by the trader when establishing the sensitivity of the indicator to changes in the price of the underlying asset. These parameters are seen on nearly all technical indicators, but for simplicity's sake we will just focus on the moving average convergence divergence (MACD) indicator.

The MACD is created by taking the difference between a short-term exponential moving average (EMA) and a long-term EMA. The two periods used for the moving averages are illustrated by the first two numbers within the brackets. In general, the two default periods for the two moving averages are 12 days for the short-term average and 26 days for the long-term average. The trader is able to reduce the indicator's sensitivity to changing prices by increasing the number of periods of the averages used in the calculation. Conversely, the trader can make the indicator more responsive by decreasing the number of periods of the EMAs. Therefore, MACD (15,35,9) would mean that the MACD is equal to the difference between a 15-day EMA and a 35-day EMA. These settings would make the indicator slightly less responsive to changes in the price of the underlying than the common MACD (12,26,9).

Now that we understand what the first two numbers mean, let's discuss the third number, which, in most cases, represents the parameter used to create the signal line (assuming the use of a signal line is appropriate for the given indicator). In the previous example, this number represents a nine-period EMA of the MACD indicator, which is nearly always plotted alongside the MACD values on a chart to give a trader an idea of when to enter a trade. (For more on the MACD indicator, see our article Moving Average Convergence Divergence - Part 1.)

RELATED FAQS
  1. What are the most common momentum oscillators used in forex trading?

    Explore two frequently used momentum indicators in forex trading, the moving average convergence divergence, or MACD, and ... Read Answer >>
  2. What are the best technical indicators to complement the Moving Average Convergence ...

    Learn the best technical indicators to use as part of a trading strategy in conjunction with the moving average convergence ... Read Answer >>
  3. What are the main differences between Moving Average Convergence Divergence (MACD) ...

    Understand the exponential moving average, or EMA, and the moving average convergence divergence, or MACD, and their respective ... Read Answer >>
  4. Why is divergence of the Moving Average Convergence Divergence (MACD) important for ...

    Learn the importance of the moving average convergence divergence, or MACD, and understand why traders consider it an important ... Read Answer >>
  5. What are the main differences between Moving Average Convergence Divergence (MACD) ...

    Learn the differences between the moving average convergence divergence (MACD) and the relative strength index (RSI), and ... Read Answer >>
  6. What is the Moving Average Convergence Divergence (MACD) formula and how is it calculated?

    Learn the formula for the moving average convergence divergence momentum indicator and find out how to calculate the MACD ... Read Answer >>
Related Articles
  1. Trading

    A Primer On The MACD

    Learn to trade in the direction of short-term momentum.
  2. Trading

    Measuring Stock Market Sentiment With Extreme Indicators

    Pay attention to how the exhaustion principle helps technical indicators signal trend reversals when abrupt value changes coincide with high trading volume.
  3. Trading

    MACD And Stochastic: A Double-Cross Strategy

    Two indicators are usually better than one. Find out how this pairing can enhance your trading.
  4. Trading

    Trading The MACD Divergence

    Currency traders can use this method to avoid stop-order triggers before the real reversal.
  5. Trading

    Spotting Trend Reversals With MACD

    Knowing when trends are about to reverse is tricky business, but the MACD can help.
  6. Trading

    Bearish MACD Crossovers With A Positive Twist

    These stocks are exhibiting bearish crossovers in their MACD readings, indicating potential short-term weakness, but also longer-term buying opportunities.
  7. Investing

    The Top Technical Indicators For Commodities Investing

    Traders can use "the usual suspects" (standard indicators for trend trading) when it comes to choosing indicators for investing in commodities. Here's how.
  8. Trading

    Candle Sheds More Light Than The MACD

    Read the case against this well-established indicator.
  9. Trading

    MACD Bearish Crossover in Downtrending Stocks (NWSA, URBN)

    The MACD is a popular moving average based indicator, and it is signaling the downtrend will continue in these stocks.
RELATED TERMS
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following ...
  2. Exponential Moving Average - EMA

    A type of moving average that is similar to a simple moving average, ...
  3. Trigger Line

    A moving-average line found in the moving average convergence ...
  4. True Strength Index - TSI

    A technical momentum indicator that helps traders determine overbought ...
  5. Indicator

    Indicators are statistics used to measure current conditions ...
  6. Signal Line

    A moving average plotted alongside a technical indicator and ...
Hot Definitions
  1. Foreign Exchange Reserves

    Foreign exchange reserves are reserve assets held by a central bank in foreign currencies, used to back liabilities on their ...
  2. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that decreased and eventually eliminated tariffs to encourage economic activity ...
  3. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  4. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  5. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  6. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
Trading Center