Moving Average Convergence and Divergence (MACD) is a momentum indicator that indicates the relationship between two moving averages.

Moving Average Convergence and Divergence (MACD) is a momentum indicator that indicates the relationship between two moving averages.

It is one of the most popular technical indicators and used by many technical analysts around the World.

It is also a trend following indicator.

The default setting of this indicator is 12 and 26 periods Exponential Moving Average (EMA
MACD is calculated by subtracting the 26 period EMA from the 12 period EMA.

The 9 period EMA is referred to as the “signal line”.

The formula for calculating MACD is:
MACD = 12 period EMA – 26 period EMA
MACD is mainly used for identifying ongoing trend and reversals.

Now let us discuss how this indicator gives buy and sell signals:

The Zero line
When the MACD linecrosses the zero line from above then it indicates that the trend may become bearish and when the MACD crosses the zero line from below then it indicates that the trend may become bullish.

As shown in the chart below:

Crossovers of MACD lines
When the MACD line crosses the signal line from below then it gives bullish signal and when the MACD line crosses the signal line from above then it gives bearish signal.
This can be seen from the chart below:

Divergences
MACD also helps in identifying bullish and bearish reversals through Divergences.
Divergences can be bullish or bearish.
When the price makes higher highs whereas MACD is making lower highs then there is a bearish divergence and bearish reversal may take place.
When the price makes lower lows and MACD is making higher lows then there is a bullish divergence and bullish reversal may take place as shown in the chart below:

Through the above ways we can bullish and bearish signals from MACD.
The MACD indicator is useful as it provides us the information of both trend and momentum in the single indicator. We usually don’t use indicator for identifying overbought and oversold regions as it does not have upper and lower limits. MACD is mainly used for identifying trend and reversals. One should also confirm the signals given by this indicator with other technical tools such as price actions.