Understanding MACD

Developed by Gerald Appel in the late seventies, Moving Average Convergence-Divergence (MACD) is one of the simplest and most effective indicators available.

The two components of MACD.

The MACD indicator is comprised of two exponential moving averages (EMA), covering two different time periods, which help to measure momentum in the security. The two exponential moving averages are the 12 period EMA and the 26 period EMA.  The MACD is the difference between these two moving averages. A 9-day EMA of MACD is plotted along side to act as a ‘signal line’ to identify turns in the indicator. MACD is all about the convergence and divergence of the above said two moving averages.

Histogram

Another aspect to the MACD indicator that is often found on charts is the MACD histogram. Thomas Aspray added a histogram to the MACD in 1986. The MACD-Histogram represents the difference between MACD and its 9-day EMA, the signal line. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.
What’s said above would be clearer if you follow the MACD signal given below. The idea behind this momentum indicator is to measure short-term momentum compared to long-term momentum to help determine the future direction of the asset. Note that the red line is the 9 day average of the MACD (and not of the stock price).

MACD signal is available on any standard online trading screen. Your online trading screen will have the option to select the MACD signal from the choices of technical indicators. The exact location of this operation varies between trading screens, but will almost always be titled “technicals” ,”indicators,” “studies,” “oscillators” or “analysis.” It may be a button on the chart, an option available by right-clicking on a chart or a menu above the chart. MACD signal will be displayed below the stock price chart.

It generates three meaningful signals for the investor: They are

  1. Crossover signal 1- MACD line crosses the signal line.
  2. Crossover signal 2- MACD Line crosses the line ‘Zero’(center line)
  3. Divergence signal- MACD line ( or histogram)  and the price of the stock (as seen on the price graph) diverge (i.e. moves in the opposite direction)

You must also read: How to read the signals generated by MACD to get a firm grip on the subject.

You may like these posts:

  1. Understanding Moving average
  2. Introduction to technical indicators
  3. Types of indicators/Oscillators

4 Responses to “Understanding MACD”

Teige

September 21, 2011 at 2:13 am

Pin my tail and call me a donkey, that really hlpeed.

Sajain Geevar

October 4, 2012 at 5:16 pm

How to read the signals generated by MACD link is broken.

J Victor

October 8, 2012 at 7:26 am

thanks for the information. we will check that .

Rahul D

August 29, 2013 at 1:14 pm

Hey Victor! Thanks for making the information available and it really helped me in understanding things more clearly. One request: “How to read the signals generated by MACD” link is broken, can you fix it?

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