Moving Average Convergence Divergence (MACD)

MACD which stands for Moving Average Convergence/ Divergence is a tool designed to help an investor follow the trend of a stock’s price. Before we get into the technicals of MACD, one must first understand the convergence and divergence aspect of the tool.
First, convergence relates to a particular thing coming together, or joining; divergence refers to a particular thing separating and going in opposite directions. Understanding this theory is the key to successfully and effectively using the tool.
According to online trading concepts.com (2007) this tool is made up of three components: 1.) MACD, which is the 12-period exponential moving average (EMA) minus the 26-period EMA; 2.) MACD signal line which is a 9-period EMA of the MACD; 3.) MACD histogram which is the MACD minus the MACD Signal Line. You can virtually disregard all of this if you are not a big mathematician and do not comprehend the statistics involved; however this is a powerful tool and it helps the investor confirm the trend and momentum of the market, whether up or down, of a particular stock. This provides the buyer or seller an opportunity to confirm his or her decision with accuracy and confidence.


In the chart above, the two lines are the 12- day exponential moving average (EMA) and the 26- day exponential moving average. In this instance, the black solid line is the 12- day moving average and the black dotted line is the 26- day moving average. This tool works exactly the same as the simple moving average; when the short- term line crosses up over (convergence) the long- term line and begins to breakaway (divergence), that is an indication that the underlying stock will move upward in price, and vice versa, when the short- term line crosses down over (convergence) the long- term line and begins a breakaway pattern (divergence) this would indicate that the stock will be moving downward in price. The 0 line is the number to watch on the MACD because it serves as a change in direction or trend indicator. If the 12- day and 26- day exponential moving averages cross above the 0 line and the price of the stock is moving up, this implies that the trend is strong. Therefore, more buyers may be moving into the stock. If the 12- day and 26- day moving averages cross below the 0 line and the stock is trading up, or sideways this would indicate that momentum is moving towards the downside. Therefore, there are more sellers, signifying that the stock will be moving downward in price.