Moving average convergence divergence (MACD) is a famous trend-following momentum indicator that shows the relationship between two moving averages of a security’s price.
Calculation of MACD is done by subtraction the value of two EMA, 12 EMA and 26 EMA. Signal line in MACD is a 9 EMA, which tells the traders about buy and sell signals. When MACD Line cross the signal line in upward direction it means that Traders may buy the security/Stock and if MACD cross the signal line in downward direction it means traders can sell the stock. Accuracy of MACD signals for buying and selling is not 100% correct. Sometimes it can give false signal.
- Moving average convergence divergence (MACD) is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.
- MACD triggers technical signals when it crosses above (to buy) or below (to sell) its signal line.
- The speed of crossovers is also taken as a signal of a market is overbought or oversold.
- MACD helps investors understand whether the bullish or bearish movement in the price is strengthening or weakening.
In MACD, there are vertical line in up and down direction, these line called as histogram which show the distance between the MACD and its signal line. If MACD is above its signal line then Histogram will be above the MACD’s baseline. If the MACD is below its signal line then the histogram will be plotted below the MACD’s baseline. Traders use this MACD’s histogram as a signal for when bullish or bearish momentum is high.
Example of MACD Crossovers
As shown in below picture, when the MACD cross the signal line in downward direction, it is a bearish signal that indicates that it may be time to sell. Conversely, when the MACD cross the signal line in upward direction.
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