The moving average convergence divergence (MACD) oscillator is one of the most popular technical indicators. Having characteristics of both leading and lagging indicators, along with a moving average trigger line, the MACD presents the kind of versatility and multifunctionality traders covet.
Perhaps more importantly, the trend-following and momentum-forecasting abilities of the MACD are not bogged down by extreme complexity. This makes it accessible to both novice and experienced traders and allows for easier interpretation and confirmation. For this reason, many consider it among the most efficient and reliable technical tools.
Though it is not useful for intraday trading, the MACD can be applied to daily, weekly or monthly price charts. The basic MACD trading strategy uses a two-moving-averages system – one 12-period and one 26-period – along with a nine-day exponential moving average (EMA) that serves to produce clear trading signals. The interaction between the two moving averages line, its own nine-day EMA and the basic price action serves as the foundation for MACD interpretation.
How MACD Can Be Used
Traders can use the MACD for signal line crossovers when the nine-day EMA is crossed by the two-moving-averages line. Additional signals are generated when the two-moving-averages line crosses above or below the zero centerline on the oscillator. You can spot divergences between the MACD lines and the price action on the chart, highlighting weak trends and possible reversals.
Understand that no technical tool can forecast with certainty. No trading system can either guarantee profits or eliminate risks. The MACD has many strengths, but it is not infallible and struggles, particularly in sideways markets. Since the MACD is based on underlying price points, overbought and oversold signals are not as effective as a pure volume-based oscillator. Always use other technical tools to confirm signals produced by the MACD, as it is the ability to work in conjunction with so many other tools that gives the MACD its reliability.
(For related reading, see "Spotting Trend Reversals With MACD.")