The Indicators

The Moving Average Convergence/Divergence (MACD) is a centered oscillator used to predict price trends and their strength. As a centered oscillator, the MACD fluctuates above and below a center, or zero, line.

The MACD incorporates the Exponential Moving Average (EMA), which smoothes out price data to better show the direction of a trend. It's calculated by subtracting a security's 26-day EMA from its 12-day EMA.

There are three common methods to interpret the MACD:

Crossovers - When the MACD falls below the signal line, it is a signal to sell. The reverse is true when the MACD rises above the signal line.

Divergence - When the security diverges from the MACD, it signals the end of the current trend.

Overbought/Oversold - When the MACD rises dramatically (shorter moving average pulling away from longer-term moving average) it is a signal the security is overbought and will soon return to normal levels.

When the MACD crosses over the zero line, it's considered a signal that prices may continue on an uptrend, and when the MACD crosses below the zero line, it's a sign that prices may continue on a downtrend.

The MACD is often used in conjunction with a nine-day EMA of the MACD itself, which acts as a trigger line or "signal" line and is usually represented as a dotted line on a MACD chart. When MACD crosses above its nine-day EMA, some analysts interpret it as a bullish signal, and when the MACD crosses below its EMA, it can be interpreted as a bearish signal.

Whether the MACD is positive or negative is also important. Positive MACD - when the shorter average is higher than the longer average - may indicate positive momentum for the security, while the opposite is true for negative MACD values.

Many analysts also use MACD as an indicator of potential trend reversals. A dramatic rise in the MACD may indicate that a security is overbought and prices may soon begin a descent, and a dramatic decrease in MACD may indicate the security is oversold and prices may soon begin to rise.

Calculation

The MACD is calculated by subtracting the value of a 26-day exponential moving average from a 12-day exponential moving average. A nine-day dotted exponential moving average of the MACD (the "signal" line) is then plotted on top of the MACD.

Sample Chart

In order to have the MACD reflect correctly, a daily chart must be selected with a minimum of two months. View Graphic

The strategies described in this article are for information purposes only, and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.