What is the MACD?
The Moving Average Convergence Divergence, or MACD, is a technical analysis indicator that is used to determine trend, strength and momentum. It is generally seen as the MAC Daddy (pun intented) of all indicators for this very reason. It combines the trend signals of moving averages, strength signals with the histogram, and momentum with the settings of a fast or slow MACD.
What is the MACD made of?
The MACD is made up of three exponential moving averages, typically the 26-day and 12-day. The MACD is the 12-day exponential moving average minus the 26-day exponential moving average. Also, the 9 day EMA of the MACD, called the signal line, is used to spot buy and sell signals. A MACD Histogram is also often used to show the momentum and is calculated as the difference between the MACD and the MACD signal line.
How to Use the MACD to Trade
The moving average convergence divergence can be used to determine a change in trend. When the MACD line crosses the signal line traders are signaled to buy or sell based on which line is on top. When the MACD line crosses the MACD Signal line from underneath and rises up, that is a signal to buy as soon as the MACD line crosses the zero bar. On the other side, when the MACD Signal line crosses the MACD line from above and drops down, that is a signal to sell as soon as the MACD crosses the zero bar.
The Moving Average Convergence Divergence is a pretty simple indicator to pinpoint trending markets. For more on how to use indicators in any type of market, sign up for our newletter, 12 Indicators to Master Any Market from Miss Wallstreet!
Photo Credits: http://en.wikipedia.org/wiki/File:MACDpicwiki.gif