What Is the Moving Average Convergence Divergence?
The moving average convergence divergence (MACD) is a popular technical momentum indicator, calculated for use with a variety of exponential moving averages (EMAs) and used to assess the power of price movement in a market.
- 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.
There are a number of calculations involved in the creation of the total (MACD) indicator, all involving the use of exponential moving averages.
An EMA is calculated as follows:
- Calculate the simple moving average (SMA) for the chosen number of time periods. (The EMA uses an SMA as the previous period's EMA to start its calculations.) To calculate a 12-period EMA, this would simply be the sum of the last 12 time periods, divided by 12.
- Calculate the weighting multiplier using this equation:
Calculate the 12 EMA sequentially as:
(Close−EMAprevious period)∗0.1538+EMAprevious period
- Calculate a 12-period EMA of the price for the chosen time period.
- Calculate a 26-period EMA of the price for the chosen time period.
- Subtract the 26-period EMA from the 12-period EMA.
- Calculate a nine-period EMA of the result obtained from step 3.
This nine-period EMA line is overlaid on a histogram that is created by subtracting the nine-period EMA from the result in step 3, which is called the MACD line, but it is not always visibly plotted on the MACD representation on a chart.
The MACD has a zero line to indicate positive and negative values. The MACD has a positive value whenever the 12-period EMA is above the 26-period EMA and a negative value when the 12-period EMA is below the 26-period EMA.
The Bottom Line
The MACD uses exponential moving averages in sequence to produce a popular indicator of momentum, which allows technical traders to spot trends and reversals.