Many traders devote excessive time and effort searching for a "perfect" indicator that will bring them immediate fame and fortune.

Their quest, however, is unlikely to succeed, because no indicator (or combination of indicators) has ever generated perfect results. Some tools do work better than others, though, and the moving average convergence divergence indicator (MACD) may be the best of the lot.

The MACD was created by Gerald Appel in the 1970s. It has three components: the MACD line, the signal line, and the histogram. The MACD line is the difference between two exponential moving averages, or EMAs (see "Exponential moving average," opposite page). The signal line is an EMA of the MACD line, and the histogram is the difference between the MACD line and the signal line.