Median Convergence Divergence

The Median Convergence Divergence indicator provides a trend-following momentum oscillator that replaces the standard moving average used in MACD with a median calculation to reduce the impact of price outliers. By focusing on the median as a measure of central tendency, this tool aims to offer a cleaner interpretation of market trends and momentum shifts in volatile environments.

Usage

The Median Convergence Divergence (MCD) is used similarly to the standard MACD for identifying trend direction, momentum, and potential reversals.

• Signal Line Crossovers: A bullish signal occurs when the MCD line crosses above the Signal line. Conversely, a bearish signal occurs when the MCD line crosses below the Signal line.
• Zero Line Crossovers: When the MCD line crosses above the zero level, it indicates a shift toward bullish momentum. A cross below the zero level suggests bearish momentum.
• Divergence: Traders can look for discrepancies between price action and the MCD. For instance, a bullish divergence occurs when price makes a lower low while the MCD makes a higher low.
• Timeframe Specifics: The default settings (5, 20, 10) are optimized for daily charts. For weekly charts, settings like (4, 13, 8) are suggested, while monthly charts may benefit from (3, 12, 6).

Details

The core concept behind the MCD is the use of the median instead of the mean (moving average). In statistics, the mean is sensitive to outliers, which can distort the perceived average value during periods of high volatility. The median effectively ignores these extreme values, providing a more stable centered oscillator.

The formula involves:

1. MCD Line: The difference between a fast median and a slow median of the source price.
2. Signal Line: A median calculation applied to the MCD line itself.
3. Histogram: The difference between the MCD line and the Signal line, represented visually to show momentum strength.

Settings

• Fast Length: The lookback period for the short-term median calculation.
• Slow Length: The lookback period for the long-term median calculation.
• Source: The price data used for calculations (default is Close).
• Signal Length: The lookback period used to calculate the signal line from the MCD value.

FAQ

How do I use the Median Convergence Divergence?

The indicator is used to find crossovers and divergences. When the blue MCD line crosses the red signal line, it indicates a change in momentum.

Why use median instead of a moving average?

The median is more robust against market "noise" and extreme price spikes (outliers), which can cause standard moving averages to lag or provide false signals.

How can I access this indicator?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.