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Technical Studies: Moving Average Convergence/Divergence (MACD)

The MACD is a lagging indicator that measures the difference between two exponential moving averages (EMA) of the security's price. An EMA of the MACD, called the "trigger" or "signal" line, is plotted to generate buy or sell signals.

The default parameters of the MACD are a 12-period (minutes/hours/days/weeks/months) EMA and a 26-period EMA. By default, the signal line is a nine-period EMA of the MACD. All three parameters use closing prices and all default parameters (12, 26, 9) can be customized.

Interpreting the MACD: In general, a sell (negative) signal is triggered when the MACD crosses below its signal line. A buy (positive) signal is triggered when the MACD crosses above its signal line. Note that the histogram on the MACD chart also highlights MAC crossovers of the signal line, as it graphs the difference between the 12-period and 26-period EMAs. The histogram is at zero when the two averages intersect, is positive when the MACD is above its nine-period EMA and is negative when the MACD is below its nine-period EMA.

When the MACD is rising, the 12-period EMA is above the 26-period EMA. The opposite is true when the MACD is falling. The size of the gap between the MACD line and the signal line is a reflection of the rate-of-change between the two averages, and therefore indicates accelerating price momentum, either upward (bullish) or downward (bearish). Some analysts will interpret extremes in the rate-of-change between the two EMAs as overbought or oversold conditions.

MACD may also be used to signal the end of a current trend, and in some cases, trend reversals. Bullish divergence is a positive MACD signal that occurs when a security's price reaches lower lows while the MACD forms a higher low. Bearish divergence is a negative MACD signal that occurs when a security's price reaches higher highs while the MACD forms a lower high. Some analysts consider divergence patterns more reliable than general MACD crossovers of the signal line.

In contrast, MACD is sometimes used as a trend-following indicator when it reaches extreme low or high levels. If the MACD is making new highs while prices fail to reach new highs, it may indicate the continuation of a bullish trend. If the MACD is making new lows while prices fail to reach new lows, it may indicate the continuation of the bearish trend.

Calculating the MACD: Closing prices for the security and the default MACD and Signal Line parameters (12, 26, 9) are used below.
MACD = 12-period EMA less 26-period EMA
Signal Line = 9-period EMA of MACD

 
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