The moving average convergence divergence indicator (MACD) was developed in the late 70s by Gerald Appel. Traders use the MACD indicator to identify changes in the momentum and direction of a trend.
The MACD is another very popular technical indicator in stock trading, so it is important to have an understanding of how it works and what it shows.
WHAT IS MOVING AVERAGE DIVERGENCE
The moving average convergence divergence (MACD) is a trend indicator.
It shows the relationship between two moving averages and the price of a stock. You might even consider it an indicator of momentum.
By default, the MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA (although these settings can be customized). A nine-day MACD EMA is what we call the “reporting line.” This is tracked over the MACD and usually acts as a trigger for buy or sell signals.
The MACD indicator can be used to identify and confirm trends, turning points and measure momentum. It often predicts a change in the strength, direction and momentum of a stock.
MACD INDICATOR
The MACD indicator is generally used in combination with other indicators or chart patterns to provide trade income and expenses. It is based on three moving time series averages.
- a fast-moving average (EMA)
- slow average (EMA)
- the difference between them, which is displayed as a line and a histogram
The fast-moving average is calculated with a shorter amount of time than the slow-moving average; this difference allows you to quickly view price changes.
How to read the MACD indicator
The moving average convergence divergence indicator attempts to identify trends and works by taking the long-term trend and comparing it to a short-term trend.
The basic idea is that when the long-term trend is
upward but the short-term trend is downward, a trader may want to look for long positions because the long-term trend is likely to reassert itself.
The same logic applies when you have a short-term uptrend and a long-term downtrend. However, the MACD indicator is more complicated than this. A MACD chart shows you three numbers:
- Draw a line that shows you how far apart your short-term EMA and your long-term EMA are, so if there is no difference between them, the line will be at zero.
- Another line shows how far your short-term EMA and your long-term EMA are from their EMAs.
- Finally, draw a histogram that shows how far those two lines are from each other.
