MACD

From Financial Literacy Wiki

MACD (Moving Average Convergence/Divergence) is a technical analysis indicator used to spot changes in the strength, direction, momentum, and duration of a trend in a stock's price.

The MACD is a computation of the difference between two exponential moving averages (EMAs) of closing prices. This difference is charted over time, alongside a moving average of the difference. The divergence between the two is shown as a histogram or bar graph.

Exponential moving averages highlight recent changes in a stock's price. By comparing EMAs of different periods, the MACD line illustrates changes in the trend of a stock. Then by comparing that difference to an average, an analyst can chart subtle shifts in the stock's trend.

Since the MACD is based on moving averages, it is inherently a lagging indicator. As a metric of price trends, the MACD is less useful for stocks that are not moving sideways or are trading erratically.

Note that the term "MACD" is used both generally, to refer to the indicator as a whole, and specifically, to the MACD line itself.

Derivation

For most of the MACD indicators out there they would first calculate the 9-day moving average followed by the 26-day moving average of each day. Then get the difference by subtracting the 26-day moving average from the 9-day moving average to derive the MACD.

MACD = [9-day moving average] - [26-day moving average]

Again depending on the traders' outlook and other factors like industry and economy, traders may adjust the formula accordingly (i.e. taking 7-day average instead of 9-day).

MACD line goes through zero happens when there is no difference between the 9-day and 26-day EMAs (Commonly known as Zero Crossover). A move from positive to negative is bearish and from negative to positive, bullish. Zero crossovers provide evidence of a change in the direction of a trend but less confirmation of its momentum than a signal line crossover.