What is MACD?

MACD means Moving Average Convergence-Divergence. It is being used to indicate the trend and momentum of a stock.

In MACD, we have a lot of parts to comprehend the chart. These are as follows:

MACD Line – the color blue line is the MACD line. It is computed by deducted the 26 day EMA from the 12 day EMA.

Signal Line – the color yellow line is the signal line. It is the 9 day EMA of the MACD.

Histogram – this is the center line with green above and below it.

Buy Signal – the green arrow.

Sell Signal – the red arrow.

Interpretation

Signal Line Crossover- when the blue line (MACD) moves above the signal line (yellow color), a buy signal (green arrows) is triggered.  It means that the upside momentum is increasing. On the contrary, when the blue line (MACD) moves below signal line (yellow color); a sell signal (red arrows) is triggered.   It means that the downside momentum is increasing.

Momentum can last for a few days or a few weeks, depending on the strength of the move.

A trader should not rely alone on this buy or sell signal if he doesn’t want to get whipsawed by the market.

The green lines that you are seeing below and above the centerline are collectively called histogram. The purpose of the histogram is to show you if the MACD (blue color) is below or above the signal line (yellow color). Obviously, the buy signal (green color) and sell signal (red color) will tell you if the MACD (blue color) is below or above the signal line (yellow color).

Centerline Crossover – when the blue line (MACD) moves above zero (centerline), the 12 day EMA overtakes the 26 day EMA. When it further increases from the centerline, it means that the trend is bullish. On the contrary, when the blue line (MACD) moves below zero (centerline), the 12 day EMA is below the 26 day EMA. When it further decreases from the centerline, it means that the trend is bearish.

The trend can last for a few days or months depending on the strength of the trend. A strong bullish trend means that the MACD (blue color) will always stay above the centerline.

Weak trends can result into MACD (blue color) crossing above or below the centerline frequently. The chart reader can be whipsawed if he fully based his chart reading on this trend indicator.

Divergence – when the stock is increasing and generates higher high, the MACD on the other hand generates lower high. This is a signal that the bullish trend is coming to an end. Conversely, when the stock is decreasing and generates lower low, the MACD on the other hand generates higher low. This is a signal that the bearish trend is coming to an end.

False Signals – just like any other indicators available, MACD generates false signal also. Thus, it will be use to use prudence when jumping to a stock to buy or sell. Generally, traders wait for two or three days to confirm if indeed the signal is correct. Of course, waiting for confirmation means diminished profit but less risk.