The Moving Average Convergence Divergence (MACD) is a momentum indicator that shows the relationship between two moving averages of a security price. It consists of the MACD line, the signal line, and the histogram. The MACD line is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. The signal line is typically a 9-period EMA of the MACD line.
Traders use the MACD to identify trend direction and potential reversals. A bullish signal occurs when the MACD line crosses above the signal line. A bearish signal occurs when the MACD line crosses below the signal line. The histogram represents the distance between the MACD line and the signal line. When the histogram bars grow taller, momentum is increasing. When they shrink, momentum is fading.
Traders often look for divergence, which happens when the price makes a new high or low that the MACD fails to confirm. This can indicate a weakening trend. Because markets are volatile, the MACD is a lagging indicator and does not predict future movements with certainty. All trading involves significant risk of loss. Beginners should practice using the MACD on paper trading accounts before committing real capital.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.