Moving average convergence divergence (MACD) is a technical indicator that follows the trend of a dynamic indicator. It shows the relationship between two moving averages of an asset price.
The MACD technical indicator is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.The MACD signal line, a 9-day EMA, is used to indicate the most favorable moments to sell or buy.
The MACD indicator provides accurate signals amid high market fluctuations within a trading channel. As a rule, traders use such signals as crossovers, overbought/oversold conditions of the market, and divergence.
Crossovers
The MACD application is based on the indicator crossover of its signal line. MACD triggers sell signals when it crosses below the signal line and buy signals when it crosses above its signal line. The indicator’s upward/downward crossovers of a zero line also provide buy or sell signals.
Overbought/oversold conditions
MACD could also be used to determine overbought/oversold conditions. When the short moving average is significantly above the long one (when MACD is rising), it means that a particular trading instrument is extremely overbought and will soon return to normal levels.
Divergence
MACD divergence from the price points to an upcoming trend change.A bullish divergence takes place when the MACD indicator reaches new highs, whereas the price remains low. A bearish divergence occurs when the indicator drops to new lows and the price remains high. Both divergence types become more important if they are formed in the overbought/oversold areas.
MACD Formula
MACD is calculated by subtracting the long-term EMA (26 periods) from the short-term EMA (12 periods). Then, a nine-day EMA, which acts as a signal line, is plotted on top of the MACD line.
MACD = EMA(CLOSE, 12)-EMA(CLOSE, 26)
SIGNAL = SMA(MACD, 9)
where
* EMA is an exponential moving average;
* SMA is a simple moving average;
* SIGNAL is a signal line of the indicator.
