What is MACD (Moving Average Convergence Divergence)? Table of Contents
What is MACD Indicator?
- MACD is a trend indicator.
- It was developed by Gerald Appel in the late 1970s.
The Moving Average Convergence Divergence (MACD) indicator is one of the most popular technical indicators used by traders because of its simplicity and flexibility as it can be used for trend following and momentum and for several financial instruments.
MACD calculates the difference between the 26-period and 12-period Exponential Moving Average (EMA).
These are represented by the bars that can be viewed on the indicator.
If the bars are above the zero levels, it means that the 12-period EMA is above the 26-period EMA (uptrend signal).
If the bars are below the zero levels, it means that the 12-period EMA is below the 26-period EMA (downtrend signal).
On the MACD chart itself, a 9-period Simple Moving Average (SMA) plotted and acts as a ‘buy’ or ‘sell’ signal.
It can be considered as a bullish signal when the MACD moves above its 9-period SMA and a bearish signal when the MACD moves below its 9-period SMA.
The MACD indicator can be found in the trading platform under ‘Insert -> Indicators -> Oscillators -> MACD’.
How does MACD work on price charts
The MACD technical indicator shows the difference between two exponential moving averages; therefore it is calculated by subtracting the 26 exponential periods of the moving averages (EMA) from the 12 periods EMA.
In addition, a 9-period EMA is formed as a “signal line”.
There are many ways to use the MACD indicator, but one of the simplest is based on the crossovers between the MACD line (orange line) and the signal line (red line).
Buy signals are formed when the MACD line crosses the signal line from below and sell signals are formed when the MACD line crosses the signal line from above.
In the upper screen, the indicator generated two examples of buy signals and three examples of sell signals.
Similar to other indicators, oscillators, and various technical analysis tools, the MACD tends to generate false signals.
To reduce the probability of generating false signals, the MACD can be used with other tools.
When all the technical tools indicate the same direction in the market, that is when the probability of success in the operation increases.