What is Moving Average Convergence Divergence ?

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Moving average convergence/divergence (MACD, or MAC-D) is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs) of a security’s price. The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA.The result of that calculation is the MACD line. A nine-day EMA of the MACD line is called the signal line, which is then plotted on top of the MACD line, which can function as a trigger for buy or sell signals. Traders may buy the security when the MACD line crosses above the signal line and sell—or short—the security when the MACD line crosses below the signal line. MACD indicators can be interpreted in several ways, but the more common methods are crossovers, divergences, and rapid rises/falls.

Definition

The Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs) of a security's price. The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA. The 9-day EMA of the MACD line is called the signal line, which can act as a trigger for buy or sell signals.

Origin

The MACD indicator was developed by Gerald Appel in the late 1970s to help traders identify changes in the trend of a security's price. With advancements in computer technology, the calculation and application of MACD have become more widespread.

Categories and Features

The main features of MACD include crossovers, divergences, and rapid rises/falls. Crossovers refer to the intersection of the MACD line and the signal line, divergences indicate a discrepancy between the price and the MACD line's movement, and rapid rises/falls refer to sharp changes in the MACD line. Each feature has specific application scenarios and pros and cons.

Case Studies

During the 2008 financial crisis, Apple Inc.'s MACD indicator showed significant divergence, alerting investors to a potential price reversal. Another example is Tesla Inc. during its stock price surge in 2020, where the rapid rise in the MACD indicator helped traders identify a strong upward trend.

Common Issues

Common issues investors face when using MACD include misinterpreting crossover signals and ignoring divergence signals. Additionally, MACD can produce misleading signals in a sideways market, so it should be used in conjunction with other indicators for analysis.

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