Loading the player...

What is the 'Moving Average Convergence Divergence - MACD'

Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

 

 

Moving Average Convergence Divergence (MACD)

BREAKING DOWN 'Moving Average Convergence Divergence - MACD'

There are three common methods used to interpret the MACD:

1. Crossovers - As shown in the chart above, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting getting "faked out" or entering into a position too early, as shown by the first arrow.

2. Divergence - When the security price diverges from the MACD. It signals the end of the current trend.

3. Dramatic rise - When the MACD rises dramatically - that is, the shorter moving average pulls away from the longer-term moving average - it is a signal that the security is overbought and will soon return to normal levels.

Traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. As you can see from the chart above, the zero line often acts as an area of support and resistance for the indicator.

Are you interested in using the MACD for your trades? Check out our own Primer On The MACD and Spotting Trend Reversals With MACD for more information!

RELATED TERMS
  1. Trigger Line

    A moving-average line found in the moving average convergence ...
  2. Signal Line

    A moving average plotted alongside a technical indicator and ...
  3. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used ...
  4. Percentage Price Oscillator - PPO

    A technical momentum indicator showing the relationship between ...
  5. Confirmation

    The use of an additional indicator or indicators to substantiate ...
  6. Ease Of Movement

    A technical momentum indicator that is used to illustrate the ...
Related Articles
  1. Trading

    A Primer On The MACD

    Learn to trade in the direction of short-term momentum.
  2. Trading

    Spotting Trend Reversals With MACD

    Knowing when trends are about to reverse is tricky business, but the MACD can help.
  3. Trading

    MACD Bearish Crossover in Downtrending Stocks (NWSA, URBN)

    The MACD is a popular moving average based indicator, and it is signaling the downtrend will continue in these stocks.
  4. Trading

    MACD And Stochastic: A Double-Cross Strategy

    Two indicators are usually better than one. Find out how this pairing can enhance your trading.
  5. Trading

    Trading The MACD Divergence

    Currency traders can use this method to avoid stop-order triggers before the real reversal.
  6. Trading

    Candle Sheds More Light Than The MACD

    Read the case against this well-established indicator.
  7. Trading

    MACD Histogram Helps Determine Trend Changes

    Learn how this momentum indicator is used to determine price action on a stock.
  8. Trading

    Measuring Stock Market Sentiment With Extreme Indicators

    Pay attention to how the exhaustion principle helps technical indicators signal trend reversals when abrupt value changes coincide with high trading volume.
  9. Trading

    Why MACD Divergence Is an Unreliable Signal

    MACD divergence is a popular method for predicting reversals, but unfortunately it isn't very accurate. Learn the weaknesses of indicator divergence.
RELATED FAQS
  1. What are the most common momentum oscillators used in forex trading?

    Explore two frequently used momentum indicators in forex trading, the moving average convergence divergence, or MACD, and ... Read Answer >>
  2. Why is divergence of the Moving Average Convergence Divergence (MACD) important for ...

    Learn the importance of the moving average convergence divergence, or MACD, and understand why traders consider it an important ... Read Answer >>
  3. How reliable is using the Moving Average Convergence Divergence (MACD) to create ...

    Find out why the moving average convergence divergence (MACD) oscillator is considered one of the simplest, most versatile ... Read Answer >>
  4. Why is the Moving Average Convergence Divergence (MACD) important for traders and ...

    Take a look inside one of the most popular and widely trusted technical indicators, the moving average convergence divergence, ... Read Answer >>
  5. What are the best technical indicators to complement the Moving Average Convergence ...

    Learn the best technical indicators to use as part of a trading strategy in conjunction with the moving average convergence ... Read Answer >>
  6. What do the bracketed numbers following a technical indicator mean?

    In technical analysis, it is common to see a series of numbers following a given technical indicator, usually in brackets. ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center