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What Is MACD?
Moving average convergence/divergence (MACD) is a technical indicator to help investors identify price trends, measure trend momentum, and identify market entry points for buying or selling. Moving average convergence/divergence (MACD)
What MACD Signals
The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA. The calculation creates the MACD line. A nine-day EMA of the MACD line is called the signal line, plotted on top of the MACD line, which can function as a trigger for buy or sell signals.
Traders may buy the security when the MACD line crosses above the signal line and sell—or short—the security when the MACD line crosses below the signal line. MACD indicators can be interpreted in several ways, but the more common methods are crossovers, divergences, and rapid rises/falls.
Using MACD
MACD has a positive value (shown as the blue line in the lower chart) whenever the 12-period EMA (indicated by the red line on the price chart) is above the 26-period EMA (the blue line in the price chart) and a negative value when the 12-period EMA is below the 26-period EMA. The level of distance that MACD is above or below its baseline indicates that the distance between the two EMAs is growing.
MACD Divergence
When MACD forms highs or lows that exceed the corresponding highs and lows on the price, it is called a divergence. A bullish divergence appears when MACD forms two rising lows that correspond with two falling lows on the price. This is a valid bullish signal when the long-term trend is still positive.
Some traders will look for bullish divergences even when the long-term trend is negative because they can signal a change in the trend, although this technique is less reliable.
Limitations of MACD
A moving average divergence can signal a possible reversal, but no actual reversal produces a false positive. False positive divergences often occur when the price of an asset moves sideways in a consolidation, such as in a range or triangle pattern following a trend.
