Moving Average Convergence Divergence (MACD) is a technical analysis momentum indicator used by traders /investors to identify the trend direction of securities.
The MACD indicator on the price chart usually has below parts:
- MACD line
- Signal Line
- Base Line
- Histogram.
Some key things to remember:
- The MACD line represents the difference between the 26day exponential moving average ( EMA) and 12day EMA.
- The signal line represents nine-day EMA.
- The baseline is at Zero level i.e horizontal axis.
- Histogram plots the distance between MACD and Signal line so histogram’s size changes as both lines converge and diverge.
- MACD Line (red) and Signal Line (blue) oscillate without boundaries around the baseline which is at zero.
- If MACD is above the signal line then the histogram will be above the baseline and vice-versa.
How to derive Trading sentiments from MACD?
Traders derive trading signals based on when MACD and Signal lines crossover, diverge, fall/ rise.
Sentiment Vs Crossover Mapping
| Bullish Sentiment |
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| Bearish Sentiment |
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Sentiment Vs Divergence Mapping
Divergence happens when there is a difference between the MACD and the price action of the security on the chart. This is considered a very strong signal.
| Bullish Sentiment | Price of the security makes lower lows and MACD line makes higher lows. |
| Bearish Sentiment | Price of the security makes higher lows and MACD line makes lower lows |