MACD

A trend-following a momentum indicator that shows the relationship between two moving averages of prices over 2 time periods. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the “signal line”, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

As with almost all indicators, since it is based on moving averages, MACD is inherently a lagging indicator.

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Moving Average Convergence Divergence – MACD

Crossovers – As shown in the chart above and below, when the MACD falls below the signal line, it is a bearish signal, which indicates Short possibilities, time to sell. When the MACD rises above the signal line, the indicator gives a bullish signal, which indicates Long possibilities, time to Buy. Many investors wait for a confirmed cross above the signal line before entering into a position to avoid getting getting “faked out” or entering  into a position too early. It is also advised to use more than one indicator to “confirm” the price movement.

Divergence – When the market price moves away from the MACD. It signals the possible end of the current trend.

Dramatic rise – When the MACD rises dramatically – the shorter moving average pulls away from the longer-term moving average – it is a signal that the market is overbought and will soon retrace to previous levels.

Investors also watch for a move above or below the zero line because this can signal the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. As you can see from the chart above, the zero line often acts as an area of support and resistance for the indicator.

 

MACD

 

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MACD shows the difference between a fast and slow exponential moving average (EMA) of closing prices.

MACD Calculation

The standard periods originally published by Gerald Appel are 12 and 26 days:

 

A signal line (or trigger line) is then formed by smoothing this with a further EMA. The standard period for this is 9 days,

 

The difference between the MACD and the signal line is often calculated and shown not as a line, but a solid block histogram style, as above