What is M.A.C.D?

The MACD is a technical analysis tool that stands for Moving Average Convergence Divergence. A technical analysis tool is ----. It is used to see if bullish or bearish behavior is strengthening or weakening.

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Terms to Know

The Moving Average is a technical analysis tool that removes market noise. In the image, the white line shows the price movements and the teal line shows the moving average. To calculate the moving average it takes the average of past points/periods. When using the moving average a period needs to be picked, like a 10 day period, 60 day period, etc.

For example, if there is a 10-day moving average. Then to find the moving average point for today, the past 10 days’ prices are averaged. By doing this for many points and days, eventually, a smoothed line is created that shows the price movements but without market noise.

This is an explanation of a simple moving average, but there are other ones like an exponential moving average.

An exponential moving average is similar to the simple moving average. One main difference is that more weight is given to recent price points in the exponential moving average, as opposed to the simple moving average where all points are given equal weightage.

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How to Read the M.A.C.D

The M.A.C.D. is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12 period EMA. This calculation is plotted as the MACD line. The signal line is the 9 day EMA of the MACD line. The MACD line and the Signal Line are plotted on top of each other so that investors/traders can see signals for buying and selling.

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A common strategy

Some investors buy when the MACD is above the signal line and sell when the MACD is below the signal line. There are many other things to notice, such as the speed of crossovers for the line (is the stock being overbought or oversold).

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Formula

MACD= 12 period EMA - 26 period EMA