What is moving average convergence divergence (MACD)?

Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a stock's price. It helps traders identify potential buy and sell signals by analyzing the changes in the strength, direction, momentum, and duration of a trend.

Components of MACD

MACD consists of three main components:

• MACD Line: The difference between the 12-day Exponential Moving Average (EMA) and the 26-day EMA. It represents the short-term trend.
• Signal Line: The 9-day EMA of the MACD line. It acts as a trigger for buy and sell signals.
• Histogram: The difference between the MACD line and the Signal line. The histogram shows the strength of the trend.

How MACD Works

MACD generates buy or sell signals based on crossovers of the MACD line and the Signal line:

• Bullish Crossover: When the MACD line crosses above the Signal line, it indicates a potential buying opportunity.
• Bearish Crossover: When the MACD line crosses below the Signal line, it suggests a potential selling opportunity.

MACD Divergence

Divergence occurs when the MACD is moving in the opposite direction of the stock’s price. Bullish divergence happens when the stock price makes new lows while the MACD makes higher lows, signaling a potential upward reversal. Bearish divergence occurs when the stock price makes new highs while the MACD makes lower highs, suggesting a potential downward reversal.