DEFINITION OF 'MOVING AVERAGE
CONVERGENCE DIVERGENCE - MACD'
A trend-following momentum indicator that shows the relationship between
two moving averages of prices. 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", is then plotted on top of the MACD,
functioning as a trigger for buy and sell signals.
1. Crossovers - As shown in the chart above, when the
MACD falls below the signal line, it is a bearish signal, which indicates that
it may be time to sell. Conversely, when the MACD rises above the signal line,
the indicator gives a bullish signal, 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 to avoid
getting getting "faked out" or entering into a position too early, as
shown by the first arrow.
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 - it is a signal that the security is overbought and will soon return to
normal levels.
Traders also 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 you can see from the chart above, the zero
line often acts as an area of support and resistance for the indicator.
Are you interested in using the MACD for your
trades? Check out our own Primer On The MACD and Spotting Trend Reversals With
MACD for more information!
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