Moving Average Convergence Divergence - a trend-following momentum indicator showing the relationship between two moving averages of price.
Deep Dive
MACD (Moving Average Convergence Divergence) is one of the most popular and reliable technical indicators. It consists of three components: the MACD line (12-period EMA minus 26-period EMA), the signal line (9-period EMA of MACD line), and the histogram (visual representation of the difference between MACD and signal lines).
MACD works as both a trend-following and momentum indicator. When the MACD line crosses above the signal line, it generates a bullish signal. When it crosses below, it's bearish. The histogram helps visualize the momentum - growing histogram bars indicate strengthening momentum, shrinking bars indicate weakening momentum.
MACD divergence, where price and MACD move in opposite directions, is particularly powerful for identifying potential reversals before they occur on the price chart.
Why It Matters
MACD helps identify trend direction, momentum, and potential buy/sell signals through crossovers and divergences.
Related Terms
- Divergence — When price makes new highs or lows but an indicator like RSI fails to confirm, suggesting weakening momentum.
- Moving Average — A technical indicator that smooths out price data by creating a constantly updated average price over a specific period.
- EMA (Exponential Moving Average) — A type of moving average that gives more weight to recent prices, making it more responsive to new information.
- Crossover — When two indicators or moving averages cross each other, often used as a trading signal.