What Does Moving Average Convergence Divergence (MACD) Mean?
A momentum indicator that shows the relationship between two moving price averages; the MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the “signal line,” then is plotted on top of the MACD, functioning as a trigger for buy and sell signals.
Investopedia explains Moving Average Convergence Divergence (MACD)
There are three common ways to interpret the MACD: (1) Crossovers. As shown in the accompanying chart, when the MACD falls below the signal line, it is a bearish signal indicating that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator is bullish, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position so that they do not get “faked out” or enter into a position too early, as shown by the first arrow in the chart. (2) Divergence. When the security price diverges from the MACD, it signals the end of the current trend. (3) Dramatic rise. When the MACD rises dramatically— that is, the shorter moving average pulls away from the longer-term moving average—this is a signal that the security is overbought and soon will return to normal levels. In addition, traders generally watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. As the accompanying chart shows, the zero line often acts as an area of support and resistance for the indicator.
Related Terms:
• Fundamental Analysis
• Moving Average
• Quantitative Analysis
• Relative Strength Index
• Technical Analysis
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