MACD ( MOVING AVERAGE CONVERGENCE / DIVERGENCE )

The Moving Average Convergence / Divergence is a technical indicator that illustrates the difference between a fast and a slow exponential moving average (EMA), usually 12 day EMA and a 26 day EMA with a 9 day EMA used as a trigger line. The 12 day EMA will react to the market more quickly than will the 26 day EMA. Visually this results in a MACD that is slanted upwards. Conversely when prices fall or trend downwards the opposite will occur and the 12 day EMA will decrease faster than will the 26 day, creating an obvious visual slant downwards. The MACD does oscillate at what would be considered a zero line.

As is the case with trading moving average crosses, buy and sell signals derived from a MACD will come from the crossing of two lines. However, these two lines are not your two EMA lines, rather one is the combined level of the two EMA lines and the second is the signal, or trigger line (the 9 day exponential moving average of the actual MACD itself). The MACD crossing signal line from above would indicate a sell order and conversely the MACD crossing the signal line from below would indicate a buy order.

MACD as a Histogram

The histogram is a visual indication of convergence (moving average lines of MACD moving towards one another) and divergence (moving average lines of MACD moving away from one another).

As the moving average lines cross the histogram will show no lines whatsoever, indicating to traders that lines (prices) may now start in a new direction.