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Type of Indicators in Technical Analysis – The Moving Average Convergence Divergence (MACD)

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The Moving Average Convergence Divergence or known as MACD in short, is one of the most popular indicators used by technical traders today. It is developed by Gerald Appel in the 1960s and is deemed as a one of the simplest yet reliable indicators for traders today.

In referring to the charts, there are two lines which represent the MACD. The first line is called the MACD line and the second is known as the MACD signal line.

The MACD line is calculated by taking the 26-day period Exponential Moving Average and then subtracting the 12-day period Exponential Moving Average, for example, 26 EMA – 12 EMA. To read further about the Moving Averages, please see this link.

The MACD signal line is a 9-day period Exponential Moving Average (9 EMA). When the MACD line crosses above the MACD signal line, it is often assumed that the trend will have a bullish tendency. When the MACD line crosses below the MACD signal line, it is assumed that the trend will tend to be bearish.

Below is an illustration of how to use the MACD as an indicator:

  • The blue line represents the MACD line (26 EMA – 12 EMA).
  • The red line represents the MACD signal line (9 EMA).

Once the blue MACD line crosses above the red MACD red line, the trend tends to be bullish. This is an indication to enter into a long position. If the blue MACD line crosses below the red MACD signal line, the trend tend to be bearish, thus an indication for traders to enter a short position.

MACD is generally known to be a lagging indicator, but there are times which it is used to forecast price movements or direction of the market.

Other Indicators in Technical Analysis:

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