The moving average convergence divergence (MACD) is a 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.
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 itself as:
(Close−EMAprevious period)∗0.1538+EMAprevious period
- Calculate a 12-period EMA of price for the chosen time period.
- Calculate a 26-period EMA of 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 also 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.