MACD is an acronym for Moving Average Convergence Divergence
In this lesson of the CFD course we will explain how it is calculated, how it works and how to use it. To test it in practice, you can access this platform with a quick registration and a trial demo account.
What is the MACD?
It is a “momentum” indicator that “follows trends” and shows the relationship between two moving averages of prices. The MACD is therefore calculated by subtracting a 26-period exponential moving average (EMA) from the 12-period exponential moving average (EMA). Another 9-period EMA is used as a reference and is called a “signal line” and is placed above the MACD, offering buy or sell signals.
Those who wish can review the lesson on moving averages.
Difficult? Let’s recap:
- EMA = Exponential Moving Average = Exponential Moving Average (you will not have to calculate it, you will find it already drawn on the chart!)
- MACD = 26-period EMA – 12-period EMA
- Signal line = a line warning what to do = 9-period EMA
Below is an example of a chart with MACD. In green, the MACD. In blue, the sign.
How is the MACD used?
The MACD in trading can be used in three different ways depending on how you interpret the market:
When the MACD falls below the signal line (9-period EMA), this method interprets it as a bearish signal and therefore invites to sell. On the contrary, when the MACD rises above the signal line, the indicator should be interpreted in a bullish way (see figure), starting from the moment of the crossing below zero.
Many traders wait for a confirmation crossover above the signal line before opening a position to avoid being penalized by entering a position too early.
b) Divergence Divergence
refers to when the price diverges from the MACD. This is the signal of the end of the current trend.
c) Sudden rise
When the MACD shows a very strong rise (the shorter moving average jumps from the long-term one) the signal is buying in excess and, therefore, it will soon return to normal levels.
Traders are also watching movements above and below the zero line with interest as this indicates the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is higher than the long-term average. On the contrary, when the MACD is below zero, the short-term average is lower than the long-term average.
The zero line often acts effectively as a support and resistance zone for the indicator.
Go to the next lesson on Bollinger Bands.
What is the MACD?
It is an indicator used in the technical analysis of financial markets and stands for Moving Average Convergence Divergence. How does MACD work?
The operation of the MACD is based on the comparison between three exponential moving averages in 26, 12 and 9 periods. How is the MACD used?
Monitoring price movements against MACD lines. What signals does the MACD indicator offer?
The MACD can offer various signals, including bullish, bearish, end of a trend (reversal), and overbought.