MACD (Moving Average Convergence Divergence)
Definition
MACD tracks the relationship between two exponential moving averages (EMAs) of a stock’s price. It shows whether the short-term trend is pulling ahead of or falling behind the longer-term trend. The standard settings are a 12-period EMA and a 26-period EMA, with a 9-period signal line.
Formula
MACD Line = 12-period EMA - 26-period EMA
Signal Line = 9-period EMA of the MACD Line
Histogram = MACD Line - Signal LineHow to Interpret It
When the MACD Line is above zero, the short-term average is above the long-term average, meaning the stock has been trending up recently. Below zero means the opposite.
The signal line acts as a smoother version of the MACD line. When the MACD line crosses above the signal line, it suggests upward momentum is building. When it crosses below, momentum is fading.
The histogram makes these crossovers easier to see. Positive bars that are getting taller mean the upward trend is accelerating. Bars that are getting shorter mean the trend is losing steam, even if the price is still going up.
Typical Strategy
The signal line crossover is the most common entry trigger. Buy when the MACD line crosses above the signal line, sell when it crosses below. This works best in trending markets but produces a lot of false signals when a stock is moving sideways.
MACD divergence is a more nuanced approach. If a stock makes a new high but the MACD makes a lower high, the upward momentum is weakening even though the price is still rising. This can warn of an upcoming reversal. The same works in the other direction — a new price low with a higher MACD low can signal that selling pressure is drying up.