Moving Average Convergence Divergence

MACD:

1. MACD stands for Moving Average Convergence Divergence and was created by Gerald Appel in 1970’s.
2. MACD uses Exponential moving average for its calculation purpose. Instead, it uses the difference between Fast Exponential moving average and slow Exponential moving average.
3. “Slow Exponential Moving Average” uses large number of days/periods in its lookback period like 9days/periods.
4. Whereas “Fast” uses less number of days. During the market movement these moving averages move away from each other or come towards each other, hence the name Moving Average Convergence Divergence.
5. MACD falls under lagging indicators, i.e. it gives signals after things have happened.

Components of Moving Average Convergence Divergence:

Slow Exponential Moving Average – we will consider 26-day for this example.

Fast Exponential Moving Average – we will consider 12-day for this example.

MACD Line – Difference of SLOW and FAST Averages. I.e; (12-Day – 26-Day)

Signal Line – 9-day Exponential Moving Average of MACD line.

MACD Histogram: MACD Line – Signal Line

Zero Line – The difference of 12-day and 26-day may be positive(above zero) or negative(below zero). When the value is above zero, it is said to be in positive zone, and when the value is below zero, it is said to be in negative zone.