MACD (Moving Average Convergence Divergence) is a technical indicator that shows the relationship between two moving averages of prices. It is designed and created by Gerald Appel during the late 1970s. The indicator is used to spot changes in the strength, direction, momentum, and duration of a trend in a stock’s price. It is considered to be one of the simplest and most effective momentum indicators available.
MACD can be pronounced in two ways – MAC-DEE or M-A-C-D
This indicator is a collection of three signals, calculated from historical price data, most often the closing price. These three signal lines are: the MACD line, the signal or average line, and the difference or divergence. The first line shows the difference between a short period exponential moving average (EMA), and a longer period EMA. The MACD line is charted over time, along with an EMA of the MACD line, termed the average line. The divergence between the MACD line and the signal line is shown as a bar graph called histogram time series.
The calculation is the following:
– MACD Line: (12-day EMA – 26-day EMA)
– Signal Line: 9-day EMA of MACD Line
– MACD Histogram: MACD Line – Signal Line
Here are some methods interpret the MACD – >
When the indicator falls below the signal line, we have a bearish signal showing that it is time to sell. Analogically, when the MACD rises above the signal line, the indicator gives a bullish signal, which means that the price of the asset is supposed to experience upward momentum. We have divergence when the security price diverges from the indicator. This is a sign for an end of the current trend. And finally, we have a dramatic rise when the MACD rises dramatically. In other words, the shorter moving average moves away from the longer-term moving average. This means that the security is overbought and will soon return to normal levels.
Besides, investors look for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average.