Moving Average Convergence/Divergence(MACD)?

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The Moving Average Convergence/Divergence indicator is a momentum oscillator primarily used to trade trends. Although it is an oscillator, it is not typically used to identify over bought or oversold conditions. It appears on the chart as two lines which oscillate without boundaries. The crossover of the two lines give trading signals similar to a two moving average system.

 

KEY TAKEAWAYS

  • The MACD line is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. The MACD signal line is a 9 period EMA of the MACD line.
  • MACD is best used with daily periods, where the traditional settings of 26/12/9 days is the norm.
  • The MACD triggers technical signals when the MACD line crosses above the signal line (to buy) or falls below (to sell) it.
  • MACD can help gauge whether a security is overbought or oversold, alerting traders to the strength of a directional move.
  • MACD can also alert investors to a bullish/bearish divergence (e.g., when a new high in price is not confirmed by a new high in the MACD, and vice versa), suggesting a potential failure and reversal.
  • After a signal line crossover, it is recommended to wait for 3-4 days to confirm that it is not a false move.

 

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