Moving Average Convergence/Divergence (MACD)

This indicator looks at the difference between two Exponential Moving Averages (EMA); usually a 26-period (Slow Moving Average) and a 12-period (Fast Moving Average). The aim of this is establish clear buy and sell opportunities. An opportunity is identified by comparing the MACD and the “signal line”. The signal line is the difference between the slow and fast moving average over, usually, a 9-period. It is plotted on the MACD chart.

Calculation
MACD
= 12-period Close EMA – 26-period Close EMA
Signal = 9-period MACD SMA


Signals

There are three most common ways to use the MACD indicator:

  • Crossovers
    When a new trend occurs the fast EMA line will react first, and then the slow line will follow.
    When the MACD falls below the signal line then you should sell. When the MACD goes above the signal line then you should buy.
  • Centerline Crossover
    This is when the MACD line crosses the zero-line. If it crosses above the line, it is a sign of a bullish trend to come and hence time to buy, and if it crosses below it signals a bearish trend and hence it’s time to sell.
  • Divergence
    When the fast line starts to move away from the slower line it shows a divergence and suggests a new trend has formed. A convergence occurs when the fast and slow line move towards each other.
    A bullish divergence is suggested when the MACD shows a higher low, and the instruments price records a lower low. The lower low confirms the downward trend, and the higher MACD show there is less downside momentum, hence a trend reversal is imminent. The instrument seems to be oversold so it is time to buy. The opposite happens with a bearish divergence, the instrument is overbought so it’s time to sell.


Red – Signal LineBlack - MACD