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Moving Average Convergence Divergence (MACD)

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The Moving Average Convergence Divergence (MACD) line is a technical indicator used by traders in the Financial Markets to forecast market movements. The MACD line is calculated as the difference between a 26-day and 12-day exponential moving average of price, while the signal line is an EMA of the MACD line with a period of nine days. The MACD line basically helps traders determine whether a security is overbought (too expensive) or oversold (too cheap).

When the MACD line crosses above the signal line, it indicates a potential uptrend and a signal for traders to buy. Conversely, if MACD crosses below the signal line, it is an indication of potential downtrend. Buy and sell points can also be forecasted by monitoring for bullish and bearish divergences, for example if price has made a new high but is not confirmed by a new high in MACD, a potential reversal could signal a sell point.

In order to ensure the validity of a signal, it is advised to wait a few days after a signal line crossover to check if it a false move. There are other variations of the MACD line, such as a triple-EMA crossover or variable MACD periods. Nevertheless, the MACD line is one of the most popular technical indicators and is used by many traders to forecast price movements. Therefore, MACD can be a useful tool for traders to determine the strength of a directional move as well as to alert them to potential price reversals.

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