Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence (MACD) is a momentum trend following indicator. Most common configuration is MACD (12, 26, and 9). It consists of three components.

MACD Line – Plot by calculating the differences between 12 and 26 days Exponential Moving Averages (EMA).

Signal Line – Plot by using 9 days Exponential Moving Averages (EMA).

MACD Histogram – Plot by calculating the difference between MACD Line and Signal Line.

MACD can be interpreted as:

Trend reversal when MACD line crosses the signal line

Chart courtesy of StockCharts.com

As you can see the accuracy is not 100%, but it does help to generate buy or sell signal depends on investor’s risk appetite.

Trend reversal when MACD line and stock price creates a divergence

Chart courtesy of StockCharts.com

Continuation trend when MACD line crosses zero and MACD line stays above signal line

Chart courtesy of StockCharts.com

Trend reversal when MACD histogram and stock price creates a Divergence

Chart courtesy of StockCharts.com

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