The Moving Average Convergence/Divergence (MACD) indicator is a momentum oscillator primarily used to trade overarching trends.
Image courtesy of Fidelity Investments.
- MACD crossing above zero is considered bullish.
- MACD turns up from below zero it is considered bullish.
- When the MACD line crosses from below to above the signal line, the indicator is considered bullish. The further below the zero line the stronger the signal.
- MACD turns down from above zero it is considered bearish.
- When the MACD line crosses from above to below the signal line, the indicator is considered bearish. The further above the zero line the stronger the signal.
During trading ranges the MACD will whipsaw, with the fast line crossing back and forth across the signal line. Users of the MACD generally avoid trading in this situation or close positions to reduce volatility within the portfolio.
Divergence between the MACD and the price action is a stronger signal when it confirms the crossover signals.
An estimated MACD can be calculated by subtracting the value of a 26 period Exponential Moving Average (EMA) from a 12 period EMA. The shorter EMA is constantly converging toward, and diverging away from, the longer. This causes MACD to oscillate around the zero level. A signal line is created with a 9 period EMA of the MACD line.
Note: The sample calculation above is the default. You can adjust the parameters based upon your own criteria.