MACD is an acronym for "Moving Average Convergence or Divergence." It is an indicator that is based on technical analysis to spot strengths, changes and momentum trends in FOREX and stock prices. The MACD is calculated as the difference between two EMAs (exponential moving averages) of closing prices. The difference is reflected on a chart over a period of time, along with the difference of the moving average. An example is shown below.
The EMAs point to any recent stock price changes. By comparing different time periods, the MACD can illustrate any changes in a stock trend. Analysts can chart the subtle shifts by comparing the difference to an average.
By looking at the MACD indicator, traders look for three signals to advise them on whether to enter the market.
When the MACD line crosses over the signal line
When the MACD line crosses over zero
A divergence occurs between the histogram and stock price, or the stock price and MACD line
Graphically speaking, this means:
The blue line crosses over the red line
The Blue line crosses over the x-axis
Highs or lows on the price graph but not the blue line; or, highs or lows on the price graph but not the bar graph
The main cues that are provided by this indicator are the signal line crossovers. Generally, a signal to buy is indicated when the MACD line moves up through the signal line; a signal to sell is indicated when it moves down through the signal line. The move upwards is known as a bullish crossover, while a move downwards is known as a bearish crossover. It is a signal to traders that the trend is about to accelerate in the crossover direction. The histogram is an important aspect of the MACD indicator, as it displays when the crossing happens. It can also help traders to visualize when a crossover is approaching. A zero crossover occurs when there is no difference in the slow and fast EMAs. A zero crossover can indicate that the trend is going to change direction, but it is not a foolproof method of evaluation.