Moving average convergence divergence (MACD)
Moving average convergence divergence (MACD)
The moving average convergence divergence (MACD) is a simple yet effective trading indicator that is used to identify new trends and decipher if they’re bullish or bearish. The MACD indicator is a trend-following momentum indicator/oscillator, developed by Gerald Appel in the late-1970s. It is used to determine the strength and momentum of a trend and is calculated on price data, which is plotted as a time series.
Calculating MACD
The MACD line is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used for these moving averages. A nine-day EMA of the MACD line is plotted with the indicator, which acts as a signal line and identifies reversals. The MACD Histogram represents the difference between MACD and its nine-day EMA, the signal line. The histogram is positive when the MACD line is above its signal line and negative when the MACD line is below its signal line. The values of 12, 26, and 9 are the typical settings used with the MACD, though other values can be substituted depending on your trading style and goals.
How to use MACD
The MACD line oscillates above and below the zero line, also known as the centerline. These crossovers signal that the 12-day EMA has crossed the 26-day EMA. The direction, of course, depends on the direction of the moving average cross. Positive MACD indicates that the 12-day EMA is above the 26-day EMA. Positive values increase as the shorter EMA diverges further from the longer EMA. This means upside momentum is increasing. Negative MACD values indicate the 12-day EMA is below the 26-day EMA. Negative values increase as the shorter EMA diverges further below the longer EMA. This means downside momentum is increasing. Signal line crossovers are the most common MACD signals. The signal line is a 9-day EMA of the MACD line. As a moving average of the indicator, it trails the MACD and makes it easier to spot MACD turns. A bullish crossover occurs when the MACD turns up and crosses above the signal line. A bearish crossover occurs when the MACD turns down and crosses below the signal line. Crossovers can last a few days or a few weeks, depending on the strength of the move.
