Description: The Moving Average Convergence Divergence oscillator or popularly called the MACD (Mac-Dee) is a very popular momentum indicator. Developed during the 1970s by Gerald Appel, the MACD line is derived by taking the difference between the 26 EMA (longer) and the 12 EMA (shorter). A 9 period EMA or the signal line is then plotted over the MACD line to generate buy or sell signals. Additionally, traders can also look for zero line crossovers and divergences for signal generations.
Due to the fact that the MACD is an unbounded oscillator, it is not very useful for identifying oversold or overbought areas. However, as it is derived out of trend following indicators, i.e., moving averages; it works well for playing the trends as well as to gauge the changes in momentum of stocks which often precede trend reversals.
MACD Line = 26 EMA – 12 EMA
Signal Line = 9 EMA of MACD Line
MACD Histogram = MACD Line – Signal Line
Signal Line Crossovers: A buy signal is generated when the MACD line crosses over the signal line. Similarly, a sell signal is generated when the MACD line crosses below the signal line.
Zero line Crossovers: When the MACD line crosses above the zero-line, a buy signal is generated. Similarly, when the MACD line crosses below the zero-line a sell signal is generated.
Divergences: When prices make a lower low, but the MACD indicator makes a higher low, we have a bullish divergence in place. Similarly, when prices make a higher high and the MACD oscillator makes a lower high, we have a bearish divergence in place.
MACD is a very popular indicator and an effective one as well. However, there are other indicators too that could be used in combination with the MACD to generate powerful trading signals. To know more on such time tested and proven combination trading strategies, attend our Mentorship program.