Moving Average Convergence Divergence (MACD)
Moving average convergence divergence (MACD) is a technical analysis term used to describe the crossing of two exponential moving averages. Created by Gerald Appel in the late 1970s, MACD remains one of the most commonly used stock indicators in today’s technical analysis process. Its primary purpose is to measure the momentum of a security by determining the difference between the two moving averages plotted against a centerline. For this indicating process, the centerline is the point at which the two moving averages are equal.
In addition to the centerline and the moving average convergence divergence, the exponential moving average of the MACD itself is included on the chart to allow for a more accurate comparison of short-term and long-term momentums of the security and help identify the current direction of those momentums.
Calculating Momentum with MACD Technical Analysis
When the short-term moving average is above the long-term moving average, the MACD technical analysis suggests a positive, upward swing in momentum. When the long-term average is above the short-term average, the MACD technical analysis is negative and suggests a downturn in momentum.
The Moving Average Convergence Divergence Histogram
The moving average convergence divergence histogram is represented by a series of bars plotted on the centerline of the graph. Each bar signifies the difference between the signal line or the nine-day exponential moving average and the moving average convergence divergence. The farther away the bars are in either direction, the more momentum there is behind the direction in which the bars point. In short, there are three tell-tale signals generated by the moving average convergence divergence indicator:
• When the MACD line crosses zero
• When the MACD line crosses the signal line
• When there is a divergence between the MACD line (or the histogram) and the stock’s price
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