MACD

MACD (moving average convergence divergence) is a momentum oscillator which has been developed in the late seventies by Gerald Appel and is used to show relationship between two moving averages of price.

The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12 day EMA. The second line that is plotted is the ‘signal’ line which is a 9 day moving average of the MACD and will thus lag behind

The MACD oscillate, without boundaries, above and below the zero line as the moving averages converge, cross and diverge.

How does it work?

  • MACD crossing above zero is considered as bullish, while crossing below is considered bearish.
  • When the MACD line crosses from below to above the signal line, the indicator is considered bullish. The further below the zero line the stronger the signal.

 

  •  When the MACD line crosses from above to below the signal line, the indicator is considered bearish. The further above the zero line the stronger the signal.
  • During trading ranges the MACD will whipsaw, with the fast line crossing back and forth across the signal line. Users of the MACD generally avoid trading in this situation or close positions to reduce volatility within the portfolio.

 

  • Divergence between the MACD and the price action is a stronger signal when it confirms the crossover signals.

 

  • The Histogram shows how close the MACD and signal line are for crossing over. When the histogram starts the turn green (or red), from being red (or green), it means that the MACD and signal line start to move towards each other. This may therefore be considered as an early warning sign.