What is MACD?

MACD

The Moving Average Convergence Divergence (MACD) is a popular technical analysis indicator used to identify changes in momentum, direction, and strength of a security's price trend. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. The result is then plotted on a chart as a line, known as the MACD line.

The MACD line is often used in combination with a signal line, which is typically a 9-period EMA of the MACD line. The signal line helps traders identify potential buy and sell signals. When the MACD line crosses above the signal line, it is considered a bullish signal, indicating that the price of the security may be trending higher. Conversely, when the MACD line crosses below the signal line, it is considered a bearish signal, indicating that the price of the security may be trending lower.

The MACD histogram is another component of the indicator, which measures the distance between the MACD line and the signal line. When the MACD line is above the signal line, the histogram is positive, indicating bullish momentum. When the MACD line is below the signal line, the histogram is negative, indicating bearish momentum.

Traders also look for divergences between the MACD and the price of the security, which may indicate potential trend reversals. For example, a bullish divergence occurs when the price of the security makes a lower low, while the MACD line makes a higher low. This may suggest that the trend is about to reverse and move higher. Conversely, a bearish divergence occurs when the price of the security makes a higher high, while the MACD line makes a lower high. This may suggest that the trend is about to reverse and move lower.

In conclusion, the MACD is a widely used technical analysis indicator that helps traders identify changes in momentum, direction, and strength of a security's price trend. It is calculated by subtracting the 26-period EMA from the 12-period EMA, and plotted as a line on a chart. The MACD line is often used in combination with a signal line, and traders also look for divergences between the MACD and the price of the security to identify potential trend reversals.