MACD, the Moving Average Convergence/Divergence indicator is a momentum oscillator primarily used to trade trends. Although it is an oscillator, it is not typically used to identify over bought or oversold conditions. It appears on the chart as two lines which oscillate without boundaries. The crossover of the two lines give trading signals similar to a two moving average system.

What Is MACD?
The Moving Average Convergence/Divergence (MACD) is a popular technical analysis tool used by investors to gauge price trends, assess trend momentum, and pinpoint potential buy or sell opportunities. Developed by Gerald Appel in the 1970s, MACD is a trend-following momentum indicator that highlights the relationship between two exponential moving averages (EMAs) of a security’s price.

The MACD line is derived by subtracting the 26-period EMA from the 12-period EMA. This calculation produces the MACD line. A nine-day EMA of the MACD line, known as the signal line, is plotted above the MACD line and serves as a potential trigger for buy or sell signals.

Traders might consider buying a security when the MACD line crosses above the signal line and selling or shorting the security when the MACD line crosses below the signal line. While there are various ways to interpret MACD indicators, the most common methods include analyzing crossovers, divergences, and rapid price movements.

How this indicator works?

MACD crossing above zero is considered bullish, while crossing below zero is bearish. Secondly, when MACD turns up from below zero it is considered bullish. When it turns down from above zero it is considered bearish.

When the MACD line crosses from below to above the signal line, it is seen as a bullish signal, with the strength of the signal increasing the further below the zero line the MACD line starts. Conversely, when the MACD line crosses from above to below the signal line, it is considered a bearish signal, with the strength of the signal growing the further above the zero line the MACD line begins.
 

In trading ranges, the MACD often exhibits whipsaw behavior, with the MACD line frequently crossing back and forth over the signal line. Traders typically avoid making trades during these periods or close existing positions to minimize portfolio volatility. Divergence between the MACD and price action can provide a more reliable signal, especially when it confirms crossover signals.
 

How do traders use moving average convergence/divergence (macd)?

Traders use the MACD to spot shifts in the direction or strength of a stock's price trend. Although it may appear complex initially due to its reliance on statistical concepts like the exponential moving average (EMA), the MACD essentially aids in identifying potential changes in a stock's momentum.

The MACD indicator consists of three components:
1.       The MACD Line which represents the difference between two moving averages.
2.       The Signal Line which is a moving average of the MACD Line.
3.       The Histogram which is a graphical representation of the distance between the MACD Line and Signal Line.

By analyzing recent momentum, MACD helps traders determine optimal points to enter, increase, or exit positions. When a new trend occurs, the faster line (MACD Line) will react first and eventually cross the slower line (Signal Line). When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often indicates that a new trend has formed.
 

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. 

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.