MACD

Moving Average Convergence/Divergence (MACD) is a technical analysis indicator used for trading financial instruments, such as stocks, commodities, and foreign exchange.

Created by Gerald Appel in the 1970’s, its purpose is to provide information to the trader with regards to an instrument’s current movement and potential behavior.

Traders typically use the MACD to assist them in making decisions on whether to buy or sell a given asset.

At the heart of it, the MACD indicator is essentially a couple of moving averages with a very simple formula.

For example, this can include the difference between a 12 period exponential moving average (EMA) and a 26 period EMA, which gives the MACD main line.

The signal line is then generated by 9 period EMA of the MACD.

In some broker platforms, the default MACD indicator doesn’t have the main MACD line, but rather is displayed as a histogram.

Despite the fact the MACD is merely an EMA crossover indicator, it does often give reliable signals especially when combined with other technical indicators and tools.

Although it is a lagging indicator, the MACD helps to eliminate market noise.

How to Trade with MACD

Most traders use the default values for the MACD period settings, which are 26, 12, and 9, although these can be changed to whatever values suit the trader’s style.

MACD can also be used for divergence trading – meaning, when the price of an instrument is diverging away from the MACD itself, this insinuates a potential for the trend to come to a halt.

In addition, traders often observe the MACD moving above or below the center zero line, which can signify momentum.

Whilst MACD might seem like a simple indicator to trade on the outset, it does need to be studied carefully and throughout back-tested on one’s instrument of choice.

This is because there are a number of ways the indicator can be traded, and not one method is suitable for every instrument or every market condition.