Moving Average Convergence/Divergence

Definition:

Moving Average Convergence and Divergence (MACD) is the difference between a fast exponential moving average (fast EMA) and a slow exponential moving average (slow EMA). The name was derived from the fact that the fast EMA is continually converging towards and diverging away from the slow EMA.

In fact, the MACD is a trend following momentum indicator that shows the relationship between three moving averages of prices.

The MACD is the difference between a 26-day and 12-day exponential moving average. A 9 period exponential moving average, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities.

On StockMarketStudio charts, we show the difference between the two moving averages (the MACD) plotted as green or blue vertical lines, and a red signal line plotted over the MACD which is a moving average of the MACD line.

Interpretation:

The MACD can be a very helpful technical indicator, and is subject to several conventional interpretations which can all be useful depending on your trading and investment philosophies:

1.  One interpretation is that a positive MACD value is a bullish signal, and a negative MACD value is a bearish signal.

2.  The crossover interpretation is the most common. The signal line is used alongside the MACD to determine the appropriate entry and exit point. Using this interpretation, the trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line.

3.  A third popular method of interpretation is that when the MACD is making new highs or lows, and the price is not also making new highs and lows, it signals a possible trend reversal. This type of interpretation is often verified with an overbought/oversold oscillator.

On StockMarketStudio charts, we show the crossover interpretation.