Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) is a popular trend following momentum indicator that uses 26 period, 12 period and 9 period exponential moving averages in its calculation. Even though it is classed as a momentum indicator, the MACD also displays oscillator qualities (achieved by plotting the difference between two moving averages).

These traits, and as its construction is quite simple, make it one of the most reliable indicators around. That said, as with all indicators, the MACD is not infallible and should be used in conjunction with other technical analysis tools.

The MACD is plotted on a chart as depicted below:

Another line is added to the MACD for interpretation purposes and is called the signal or trigger line. The signal line is a 9 period exponential moving average of the MACD itself and is the dotted line shown in the chart. Naturally, the signal line lags slightly behind the MACD. The filled-in appearance of the MACD has been chosen to make it easier to distinguish between the MACD line and the signal line.

There are 3 common methods to interpret the MACD:

• When the MACD crosses above the slower trigger line, this is a bullish signal. Vice versa when the MACD falls below the signal line, it is a signal to sell.
• When the security diverges from the MACD it warns that the current trend may have come to an end.
• When the MACD crosses above the centre line (zero), this is a bullish signal and when the MACD falls below the centre line, this is a bearish signal.

Another common use of the MACD is to derive a MACD Histogram. The MACD Histogram is calculated by subtracting the signal line from the MACD line resulting in a single line. This line can be used by crossovers of the centre line (which is where the MACD crosses with the signal line) and for divergence between the price and the MACD Histogram.