The Moving Average Convergence/Divergence Indicator – MACD
A technical analysis indicator, traders use MACD to spot trends. The indicator is a momentum oscillator; however, it’s not used to identify oversold or overbought conditions like RSI. That said, MACD and RSI compliment each other and are often used together by traders.
How To Read MACD
The components of the MACD consist of three components: MACD Histogram, MACD Line, and Signal Line. The MACD line is the 12-day exponential moving average minus the 26-day exponential moving average. The signal line is the 9-day exponential moving average. The MACD histogram is the MACD line minus the signal line.
The line oscillates above and below the zero line. A positive MACD implies that the 12-day exponential moving average is above the 26-day exponential moving average. On the other hand, a negative MACD implies that the 12-day exponential moving average is below the 26-day exponential moving average.
As you can see, MACD is all about how the two moving averages react, and whether they converge or diverge.
A bullish crossover happens when the MACD turns higher and above the signal line. A bearish crossover happens when the MACD turns lower and is below the signal line.
Traders will look for centerline crosses. A bullish centerline cross happens when the line moves above the zero line and turns positive. A bearish centerline crossover happens when the MACD moves below the zero line and turns negative.
The MACD line is in red and the signal line is blue on the chart above.
Traders often compare the price action to the MACD. For example, if a stock is making lower lows and MACD is making higher highs. The divergence could imply that the stock has bottomed and be due for a bounce.
The moving average convergence/divergence indicator is very popular among traders. It’s used to spot trends. Its very simple to understand and most charting packages offer it, making it readily available to anyone.
Furthermore, test it out for yourself, mix and match with other indicators and see if you can gain greater insight to your trading.