MACD

The MACD (Moving Average Convergence Divergence) is a momentum indicator that tracks how two exponential moving averages move apart (diverge) and towards each other (converge). It can therefore be used to identify trend reversals as well as changes in the strength of a trend. The MACD was introduced by Gerald Appel in the late 1970s and is one of the most frequently used indicators in technical analysis.

How the MACD is calculated

The indicator consists of three components:

• MACD line: the difference between a faster and a slower exponential moving average (EMA), with standard settings of 12 and 26 periods.
• Signal line: a 9-period EMA of the MACD line.
• Histogram: the difference between the MACD line and the signal line, displayed as bars.

Example: if the 12-day EMA of a share is $108 and the 26-day EMA is $105, the MACD line has a positive value of 3. A positive value means that the short-term average is above the long-term average – momentum is pointing upwards. If the distance between the two averages shrinks, the MACD falls towards zero, which indicates that upward momentum is fading.

Why the MACD matters for traders

Traders mainly watch for three types of signal: the MACD line crossing above or below the signal line, the MACD crossing the zero line, and divergences – for example when the price makes a new high but the MACD does not. Such divergences can be an early warning of a possible trend reversal. Because the MACD is based on moving averages, it lags behind the price and can produce many false signals in sideways markets. It is therefore often combined with other indicators such as the RSI.