Moving average convergence/divergence (MACD, or MAC-D) is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs) of a security’sprice. The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA.
The result of that calculation is the MACD line. A nine-day EMA of the MACD line is called the signal line, which is then plotted on top of the MACD line, which can function as a trigger for buy or sell signals. Traders may buy security when the MACD line crosses above the signal line and sell—or short—the security when the MACD line crosses below the signal line. MACD indicators can be interpreted in several ways, but the more common methods are crossovers, divergences, and rapid rises/falls.
The moving average convergence/divergence (MACD, or MAC-D) line is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. The signal line is a nine-period EMA of the MACD line.
MACD is best used with daily periods, where the traditional settings of 26/12/9 days is the norm.
MACD triggers technical signals when the MACD line crosses above the signal line (to buy) or falls below it (to sell).
MACD can help gauge whether a security is overbought or oversold, alerting traders to the strength of a directional move, and warning of a potential price reversal.
MACD can also alert investors to bullish/bearish divergences (e.g., when a new high in price is not confirmed by a new high in MACD, and vice versa), suggesting a potential failure and reversal.
After a signal line crossover, it is recommended to wait for three or four days to confirm that it is not a false move.
Learning from MACD
MACD has a positive value (shown as the blue line in the lower chart) whenever the 12-period EMA (indicated by the red line on the price chart) is above the 26-period EMA (the green line in the price chart) and a negative value when the 12-period EMA is below the 26-period EMA. The level of distance that MACD is above or below its baseline indicates that the distance between the two EMAs is growing.
In the following chart, you can see how the two EMAs applied to the price chart correspond to the MACD (blue) crossing above or below its baseline in the indicator below the price chart.
MACD is often displayed with a histogram (see the chart below) that graphs the distance between MACD and its signal line. If MACD is above the signal line, the histogram will be above the MACD’s baseline or zero line. If MACD is below its signal line, the histogram will be below the MACD’s baseline. Traders use the MACD’s histogram to identify when bullish or bearish momentum is high—and possibly overbought/oversold.
Example of MACD Crossovers
As shown on the following chart, when MACD falls below the signal line, it is a bearish signal indicating that it may be time to sell. Conversely, when MACD rises above the signal line, the indicator gives a bullish signal, suggesting that the price of the asset is likely to experience upward momentum. Some traders wait for a confirmed cross above the signal line before entering a position to reduce the chances of being faked out and entering a position too early.
Crossovers are more reliable when they conform to the prevailing trend. If MACD crosses above its signal line after a brief downside correction within a longer-term uptrend, it qualifies as a bullish confirmation and the likely continuation of the uptrend.
If MACD crosses below its signal line following a brief move higher within a longer-term downtrend, traders would consider that a bearish confirmation.
Disclaimer: The views, thoughts, and opinions expressed in the article shall not be considered as investment advice and do not reflect the position of CoinTR, please use it at your own risk.