MACD, which stands for Moving Average Convergence / Divergence, is a technical analysis indicator created by Gerald Appel in the 1960s. It shows the difference between a fast and slow exponential moving average (EMA) of closing prices. During the 1980s MACD proved to be a valuable tool for any trader. The standard periods recommended back in the 1960s by Gerald Appel are 12 and 26 days:

MACD=EMA[12] of price - EMA[26] of price

A signal line (or trigger line) is then formed by smoothing this with a further EMA. The standard period for this is 9 days, Signal Line=EMA[9] of MACD

The MACD and the signal line are often displayed as two lines

As a general rule, it is considered bullish when the MACD Line is rising and is above the Signal Line. Conversely, it is bearish when the MACD Line is falling and is below the Signal Line.

Buy and sell signals are generated by the crossing of the two lines. In general, a buy signal occurs when the MACD Line crosses from below to above the Signal Line. A sell signal is indicated when the MACD Line crosses from above to below the Signal Line.

Because of its smoothed nature, this indicator can be helpful in highly volatile markets such as the options market. Although generally less effective during narrow, trendless markets, it provides good signals during widely swinging trading ranges and at the conclusion of strong trends.

MACD is especially valuable for its ability to signal a turnaround following a sharp decline. In this situation, divergences are particularly significant and often predate important market bottoms. Divergences pertain to trends and occur when the trend of price action and the trend of an indicator are in opposite directions.



In addition to trend breaks, divergences, and Signal Line crossings, it is important to watch for overbought and oversold levels. When the MACD rises above a certain level, the ticker is in an overbought region and a reversal is likely. The same is true in the oversold direction.