MACD (Moving Average Convergence Divergence)
Quick Answer
A trend-following momentum indicator showing the relationship between two moving averages.
What is MACD?
MACD (Moving Average Convergence Divergence) is one of the most popular and reliable technical indicators. Developed by Gerald Appel in the late 1970s, it's designed to reveal changes in strength, direction, momentum, and duration of a trend.
The indicator consists of three components: the MACD line, the signal line, and the histogram. Together, these elements help traders identify potential entry and exit points.
Components
MACD Line Calculated by subtracting the 26-period EMA from the 12-period EMA. When the MACD line is positive, the short-term average is above the long-term average, indicating upward momentum.
Signal Line A 9-period EMA of the MACD line. It acts as a trigger for buy and sell signals.
Histogram The visual difference between the MACD line and signal line. It helps traders see the momentum and potential trend changes more clearly.
Trading Signals
Crossovers Bullish: When MACD crosses above the signal line Bearish: When MACD crosses below the signal line
Divergence Bullish divergence: Price makes lower lows while MACD makes higher lows Bearish divergence: Price makes higher highs while MACD makes lower highs
Zero Line Crosses Bullish: MACD crosses above zero Bearish: MACD crosses below zero
Real-World Example
A bullish MACD crossover in Tesla stock in April 2020, where the MACD line crossed above the signal line, preceded a massive rally that took the stock from $150 to over $900.