MACD

Moving average convergence/divergence (MACD) is a technical indicator to help investors identify price trends, measure trend momentum, and identify entry points for buying or selling. Moving average convergence/divergence (MACD) is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs) of a security’s price.

The MACD line (shown as blue) is calculated by subtracting the 26-period EMwA from the 12-period EMA. The calculation creates the MACD line. A nine-day EMA of the MACD line is called the signal line (shown as orange), 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.

\(\text{MACD} = \text{12-Period EMA} - \text{26-Period EMA}\)

As shown on the following chart, when MACD falls below the signal line, it is a bearish signal indicating that it may be time to sell. Conversely, when MACD rises above the signal line, the signal is bullish, suggesting that the asset’s price might experience upward momentum. Crossovers are more reliable when they conform to the prevailing trend. If MACD crosses above its signal line after a brief downside correction within a longer-term uptrend, it qualifies as a bullish confirmation and the likely continuation of the uptrend.