Moving Average Convergence Divergence
A momentum indicator built from two EMAs — signals trend changes through crossovers and divergence with price.
Description
MACD (Moving Average Convergence Divergence) was developed by Gerald Appel in the late 1970s. It converts the relationship between two EMAs into a momentum oscillator, measuring whether the faster EMA is moving toward or away from the slower one. When they diverge, momentum is building; when they converge, it is fading.
How It Works
Standard MACD uses three components. The MACD line is the 12-period EMA minus the 26-period EMA — it oscillates above and below zero. The signal line is a 9-period EMA of the MACD line, smoothing it further. The histogram is the difference between the MACD line and the signal line, giving a visual sense of how quickly momentum is building or fading. These defaults (12, 26, 9) were calibrated by Appel for daily charts.
How to Read It
A MACD line crossing above the signal line is a bullish signal; crossing below is bearish. When both lines cross from below zero to above, it confirms the longer-term trend is turning up. The histogram’s rising bars indicate building momentum, shrinking bars indicate fading momentum. Divergence — price making new highs while MACD makes lower highs — often warns that the move is exhausting before price confirms it.
Common Uses
- Trend confirmation on daily and weekly charts
- Crossover signals for entry timing
- Divergence detection as an early reversal warning
- Momentum measurement to gauge move strength
Caveats
MACD is a lagging indicator — it reacts to price history rather than leading it. In choppy or sideways markets it generates frequent false crossover signals. The default settings were designed for daily charts; applied to hourly or lower timeframes, the signals are significantly noisier. MACD also has no fixed overbought/oversold range, making absolute readings less useful than relative changes.