Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) indicator is a popular technical analysis tool used to identify trends and potential buy and sell signals in the market. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A 9-day EMA of the MACD is then plotted on top of the MACD line, which is called the “signal” line.

How to use MACD?

The MACD line and the signal line are used to generate buy and sell signals. A bullish signal is generated when the MACD line crosses above the signal line, and a bearish signal is generated when the MACD line crosses below the signal line.

Another way to use the MACD is to look for the divergence between the MACD and the price of the security, if the price is making a new high and the MACD is not confirming it, it could signal a potential reversal. This can also work the other way around if the price is making new lows and the MACD is not confirming it.

What is the caution to be used while using MACD?

MACD is a lagging indicator, meaning that it tends to confirm trends after they have already started. Additionally, the MACD is more effective in trending markets than in choppy, sideways markets.