The MACD indicator, or Moving Average Convergence Divergence, is a popular technical tool used in stock analysis to identify trend direction and momentum. It shows the relationship between two moving averages of a stock’s price — usually the 12-day and 26-day exponential moving averages (EMAs). Traders use MACD to spot buy or sell signals by watching crossovers and divergences in the MACD and signal lines.
What Does MACD Stand For in Trading?
MACD stands for Moving Average Convergence Divergence. It is a momentum indicator that shows the relationship between two moving averages — the 12-period EMA and the 26-period EMA. The result of this calculation is the MACD line. A 9-period EMA of the MACD line is called the signal line, which helps generate trading signals.
How Does the MACD Indicator Work?
The MACD indicator works by measuring the difference between the 12-day EMA and the 26-day EMA. When the MACD line crosses above the signal line, it gives a buy signal. When it crosses below, it gives a sell signal. The histogram (bars) shows the distance between the MACD line and the signal line. If the bars are growing, momentum is strong. If they shrink, momentum is weakening.
How to Read MACD Crossover Signals?
A MACD crossover happens when the MACD line crosses the signal line.
Buy Signal: When MACD crosses above the signal line.
Sell Signal: When MACD crosses below the signal line.
This is one of the most common ways traders use MACD to make entry or exit decisions in stocks. These signals are stronger when they occur away from the zero line.
What is MACD Divergence and Why is it Important?
MACD divergence happens when the price of a stock and the MACD indicator move in opposite directions.
Bullish Divergence: Price makes a lower low, but MACD makes a higher low — this may signal a reversal to the upside.
Bearish Divergence: Price makes a higher high, but MACD makes a lower high — this may signal a downward move.
Divergence helps traders spot trend reversals early.
Is MACD Reliable for Intraday and Swing Trading?
Yes, MACD is useful for both intraday and swing trading. For intraday, use shorter time frames like 5-minute or 15-minute charts. For swing trading, use daily or hourly charts. Combine MACD with volume, support/resistance, and price action for better results. It works best in trending markets, not sideways ones.
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