A Moving Average Convergence Divergence (MACD) is a trend-following indicator that demonstrates the relationship between two moving averages of prices. It consists of a speed line and a signal line.
The speed line is calculated as follows: 12day EMA - 26day EMA (EMA stands for Exponential Moving Average)
The signal line is a 9day EMA which is functions as a trigger to buy and sell.
There are a few applications that Traders use with regard to MACD. They are as follows...
- Crossovers - Crossovers are the most popular analysis methods associated with MACD. A crossover is when the speed line crosses through the signal line. A bullish crossover takes place when the speed line is below the signal line, moves up, and crosses through the signal line. A bearish crossover is when the speed line is above the signal line, moves lower, and crosses. MACD crossovers can prove very successful when used in a stock that has a history of responding to them.
- Convergence - A convergence is when the speed line begins to close in on the signal line. If the speed line is converging from below the signal line, this indicates the potential for a bullish crossover in the near future. If the speed line is converging from above the signal line, it indicates potential for a bearish crossover in the near future.
- Divergence - A MACD diveregence is when the speed line separates from the signal line. The larger the separation, the higher the potential that they will converge in the near future. If the speed line is well below the signal line, it will have to turn higher in order to converge with this signal line. This will require upside action in the stock. Therefore, a large convergence below the signal line is potentially bullish. The same goes for the opposite scenario.
MACD is often used in a day trading system, stock trading system, options trading system, and futures trading system.
Related terms: Moving Average, Simple Moving Average, RSI, Fibonacci Retracement, Geometric vs Functional