Moving Average Convergence / Divergence

The Moving Average Convergence/Divergence (MACD) indicator is the difference between two price moving averages:

  • The 26-period exponential moving average (EMA)
  • The 12 periods EMA

The MACD is compared to a signal line, which is the 9 periods 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.

Calculation

MACD = EMA( CLOSE, 12 ) – EMA( CLOSE, 26 )

SIGNAL = SMA( MACD, 9 )

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