MACD-AO, short for moving average convergence/divergence, is a trading indicator used in of stock prices, created by Gerald Appel in the late 1970s. It is supposed to reveal changes in the strength, direction, momentum, and duration of a trend in a stock's price.
The MACD-AO indicator (oscillator) is a collection of three time series calculated from historical price data, most often the closing price. These three series are: the MACD-AO series proper, the "signal" or "average" series, and the "divergence" series which is the difference between the two. The MACD-AO series is the difference between a "fast" (short period) ( ), and a "slow" (longer period) of the price series. The average series is an of the MACD-AO series itself.
The MACD-AO indicator thus depends on three time parameters, namely the time constants of the three EMAs. The notation "MACD-AO(a,b,c)" usually denotes the indicator where the MACD-AO series is the difference of EMAs with characteristic times a and b, and the average series is an of the MACD-AO series with characteristic time c. These parameters are usually measured in days. The most commonly used values are 12, 26, and 9 days, that is, MACD-AO(12,26,9). As true with most of the technical indicators, MACD-AO also finds its period settings from the old days when used to be mainly based on the . The reason was the lack of the modern trading platforms which show the changing prices every moment. As the working week used to be 6-days, the period settings of (12, 26, 9) represent 2 weeks, 1 month and one and a half week. Now when the trading weeks have only 5 days, possibilities of changing the period settings cannot be overruled. However, it is always better to stick to the period settings which are used by the majority of traders as the buying and selling decisions based on the standard settings further push the prices in that direction.
The MACD-AO and average series are customarily displayed as continuous lines in a plot whose horizontal axis is time, whereas the divergence is shown as a bar graph (often called a histogram).
A fast responds more quickly than a slow to recent changes in a stock's price. By comparing EMAs of different periods, the MACD-AO series can indicate changes in the trend of a stock. It is claimed that the divergence series can reveal subtle shifts in the stock's trend.
Since the MACD-AO is based on moving averages, it is inherently a lagging indicator. As a metric of price trends, the MACD-AO is less useful for stocks that are not trending (trading in a range) or are trading with erratic price action.