What is MACD? Moving Average Convergence/Divergence

MACD Indicator

Moving Average
MACD, short for moving average convergence / divergence, is a market measure used in the technical analysis of stock prices, created by Gerald Appel in the late 1970s. It is structured to reveal changes in the power, path, momentum and length of the stock price cycle.

The MACD indicator (or “oscillator”) is a list of three time series based on historical price data, most often the closing price. Such three series are: the standard MACD series, the “signal” or “average series”, and the “divergence” series, which is the difference between the two. The MACD series is the difference between the “fast” (short-term) exponential moving average (EMA) and the “slow” (longer-term) EMA of the price series. The average value is the EMA of the MACD series.

The MACD indicator thus depends on three time parameters, namely the time constants of the three EMAs.

Typically these parameters are measured in days. The most commonly used values are 12, 26 and 9 days, i.e. MACD(12,26,9). As with most of the technical indicators, MACD often retains its period settings from the old days when the technical analysis used to be mostly based on the daily charts The explanation for this was the lack of online trading platforms that display changing prices any moment.

Fast EMA responds more quickly than slow EMA to recent changes in stock prices. Through comparing the EMAs of different periods, the MACD series will show changes in the stock pattern. It is believed that the divergence series may show subtle shifts in the stock pattern.

Since the MACD is based on moving averages, it is inherently a lag indicator. As a future metric of price trends, MACD is less useful for stocks that are not trendy (trading in a range) or trade with erratic price action.

Signal-line crossover


A “signal-line crossover” occurs when the MACD and the average lines cross; that is, when the discrepancy (the bar graph) changes the sign. The standard interpretation of such an event is a recommendation to purchase if the MACD line crosses the average line (the “bullish” crossover) or to sell if it crosses the average line (the “bearish” crossover). These events are taken as indications that the trend in the stock is about to accelerate towards the crossover.

Zero crossover


The “zero crossing” event occurs when the MACD sequence switches the symbol, i.e. the MACD line crosses the horizontal zero axis. It occurs when there is no difference between fast and slow price sequence EMAs. The transition from positive to negative MACD is perceived as “holding” and from negative to positive as “bullish.” Zero crossovers provide evidence of a change in the direction of a trend but less confirmation of its momentum than a crossover signal line.

Divergence


A “positive divergence” or “bubble divergence” occurs when a new price is low, but the MACD does not confirm a new low of its own. A “negative divergence” or “bearing divergence” occurs when a new price is high, but the MACD does not confirm a new high of its own. A price divergence may occur on the MACD line and/or the MACD Histogram.

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