1) Define Moving average convergence divergence (MACD).
Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a stock’s price.
MACD helps investors understand whether the bullish or bearish movement in the price is strengthening or weakening.
2) Calculation:
Formula for MACD is
MACD = 12 period EMA – 26 period EMA
3) How MACD is interpreted in a chart.
Along with MACD line a nine-day EMA of the MACD called the “signal line,” is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals.
Moving average convergence divergence (MACD) indicators can be interpreted in several ways, but the more common methods are crossovers, divergences, and rapid rises/falls.
MACD is displayed with a histogram which graphs the distance between the MACD and its signal line. If the MACD is above the signal line, the histogram will be above the MACD’s baseline. If the MACD is below its signal line, the histogram will be below the MACD’s baseline. Traders use the MACD’s histogram to identify when bullish or bearish momentum is high.
4) Sample Chart with MACD indicator used:
