Understanding MACD

Definition:

MACD stands for Moving Average Convergence Divergence. It is a technical analysis (TA) indicator created by Gerald Appel in the 1960s. It shows the difference between a fast and slow exponential moving average (EMA) of closing prices. MACD is made up of 2 lines. The MACD Line and MACD Signal Line.

Setting:

Common MACD setting is 12, 26, 9. The standard periods recommended by Gerald Appel; 12 and 26 days.

MACD is plotted = EMA [12] of price – EMA [26] of price

MACD signal line is plotted by smoothing MACD line with a further EMA. Sometimes, SMA (simple moving average) is used. The standard period for this is 9 days;

(MACD) Signal line = MEA [9] of MACD

In 1986 Thomas Aspray created MACD Histogram. It is the difference between the MACD and the signal line and it represents in a solid block histogram style;

(MACD) histogram = MACD – Signal Line

Usage:

MACD is a trend following tool and a momentum indicator that shows acceleration and deceleration of a trend. It is useful for spotting major trend reversal.

  • MACD line crossing the signal line.
  • MACD line crossing zero line.
  • Divergence between price and histogram, or between MACD line and price.

Buy Signals – when the MACD Line crosses above the MACD Signal Line or MACD Line crosses up Zeroline. Sell Signals – when the MACD Line crosses below the MACD Signal or MACD Line crosses down Zeroline. Divergence for spotting the trend reversal.