The MACD (Moving Average Convergence/Divergence) is a momentum indicator used to show the relationship between two moving averages. The MACD was developed by Systems and Forecasts publisher, Gerald Appel.
The MACD is simple and reliable. It uses moving averages to include trend-following characteristics. These lagging indicators are turned into a momentum oscillator and plotted as a line that moves above and below zero with no upper or lower limits.
The MACD proves most effective in studying wide-swinging trading markets.MACD (2-lines) shows the relationship between a 26-day and 12-day Exponential Moving Average with a 9-day Exponential Moving Average (the "signal" or "trigger") line plotted on top to show buy/sell opportunities.Three popular ways to use the MACD are crossovers, overbought/oversold conditions and divergences.
The basic MACD trading rule is sell when the MACD falls below its signal line and buy when the MACD rises above it. It is also common to buy/sell when the MACD goes above/below zero.
- Overbought/Oversold Conditions:
The MACD is also can be used as an overbought/oversold indicator. If the shorter moving average pulls away dramatically from the longer moving average and the MACD rises it is likely that the security price is overextended and will soon return to more realistic levels.
Expect the end a current trend may be near when the MACD diverges from the price of a security. A bearish divergence occurs when the MACD is making new lows while prices fail to match these lows. Likewise, a bullish divergence occurs when the MACD is making new highs while prices fail to follow suit. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.
Signals from the MACD Indicator can tend to lag behind price movements. The MACD Histogram is an attempt to address this situation showing the divergence between the MACD and its reference line (the 9-day Exponential Moving Average) by normalizing the reference line to zero. As a result, the histogram signals can show trend changes well in advance of the normal MACD signal.A buy signal is generated as the histogram crosses above the zero point. A sell signal is generated as the histogram crosses below zero.