The Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs) of a security's price. It's designed to reveal changes in a stock's momentum. The MACD is calculated by subtracting the 26-period EMA from the 12-period EMA.
Formula: MACD Line = (12-period EMA) - (26-period EMA)
A signal line, which is typically a 9-period EMA of the MACD line, is plotted on top of the MACD line. This helps to visualize potential buy and sell signals.
Signal Line = 9-period EMA of MACD Line
Bullish Crossovers: When the MACD line crosses above the signal line, it is often interpreted as a bullish signal, suggesting that upward momentum is increasing. This can indicate a potential buying opportunity.
Bearish Crossovers: Conversely, when the MACD line crosses below the signal line, it is considered a bearish signal, indicating that downward momentum is building. This may suggest a selling opportunity.
Divergence: MACD can also be used to spot divergence. Bullish divergence occurs when the price makes lower lows, but the MACD makes higher lows, suggesting potential reversal upwards. Bearish divergence occurs when the price makes higher highs, but the MACD makes lower highs, indicating a potential reversal downwards.
Centerline Crossovers: When the MACD crosses above the zero line, it suggests that the 12-period EMA is above the 26-period EMA, indicating bullish momentum. Crossing below the zero line suggests bearish momentum.
Represents the difference between the shorter and longer-term EMAs. It's the primary indicator of momentum.
A moving average of the MACD line, used to generate trading signals through crossovers.
The difference between the MACD line and the signal line. It visually represents the distance between the two lines and can highlight momentum shifts.
A typical MACD chart displays the MACD line, the signal line, and a histogram below the price chart.