The Moving Average Convergence/Divergence (MACD) indicator is the difference between two price moving averages:
- The 26 period exponential moving average (EMA)
- The 12 period EMA
The MACD is compared to a signal line, which is the 9 period simple moving average (SMA) of the MACD.
The MACD is most useful in volatile markets. It is interpreted in the following ways:
- A buy signal occurs when the MACD falls below its signal line
- A sell signal occurs when the MACD moves above its signal line
- The market is overbought when the MACD rises sharply
- The market is oversold when the MACD drops sharply
- A bullish divergence occurs when the MACD makes new highs and the price doesn’t
- A bearish divergence occurs when the MACD hits new lows and the price doesn’t
The bearish and bullish divergences are more significant when the market is overbought or oversold.
MACD = EMA( CLOSE, 12 ) – EMA( CLOSE, 26 )
SIGNAL = SMA( MACD, 9 )