Convergence/Divergence ("MACD") Indicator – Pronounced "Mac Dee"
MACD is an oscillator that uses two moving averages that continually
converge with and diverge from each other. When the trends are analyzed, they are
used to time trading decisions for both individual stocks and the market.
The faster trendline tracks the difference between the 12 day and 26 day
exponential moving average ("EMA"). The second slower signal-line tracks a
9-day EMA of the faster (12 day – 26 day) EMA trendline. The slower
signal-line is also referred to as the trigger line. The main objectives of
the MACD oscillator are:
- To identify and signal trend reversals, by generating buy and sell
signals as the trendlines cross over each other.
- To pinpoint overbought and oversold stocks, i.e.: stocks that are
unusually high and may decline, and stocks that are usually low and might
- To confirm price and momentum trends.
Below is a diagram of the MACD oscillator, using Imperial Chemical
Industries as an example. ICI is a global chemical company that successfully
re-created itself by selling off its low margin, highly cyclical, commodity
petro-chemical businesses and by purchasing less cyclical, higher margin
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The trendline oscillates around a zero horizontal centerline. When the
MACD trendlines go above the zero point, they indicate an upward or buy
trend. When the MACD trendlines fall below zero, they indicate a downward or
The crossovers between the two moving averages generate buy and sell
signals. When the faster MACD line crosses over and goes above the slower
signal line, it indicates a buy signal. Conversely, when the faster MACD
line crosses below the slower moving average line, it indicates a sell
signal. When the trendlines cross each other, they signal a reversal or end
to the current trend and the start of a new trend.
A divergence from the MACD trendline creates new trading signals. For
instance, when the price of a stock diverges from the MACD trendlines, it’s
a sign of the end of the current trend.
Additionally, when the faster moving
average trendline diverges in an upward direction from its slower signal
line, it indicates that the stock may be overvalued, overextended,
overbought and that it may retrench to more realistic or normal levels.
Conversely, if the opposite occurs, and the MACD trendline diverges in a
downward direction from the trigger line, it can indicate that a stock has
been oversold. Additionally, always keep abreast of company news when making
decisions. Divergences occur for a reason; try to find out what caused them.
When the faster MACD trendline is greater than the slower MACD signal
trendline, it indicates that the stock has positive momentum. Conversely,
when the faster MACD line is less than the slower signal line, it indicates
a declining momentum.
During rising markets, the faster moving average trend will rise quicker
than the slower moving average. The reverse will happen in a declining
market; the faster moving average trend will fall more quickly than the
By using two moving averages, the MACD oscillator often can identify
stock highs and lows, as well as signal changes in the direction of stock
prices. Identifying the direction of price movements early on is always
valuable information for investors.
Click below for more information on oscillators:
Rate of Change
Relative Strength Index
Money Flow Index
Volume + Moving Average