Moving Average Convergence/Divergence, or MACD, is a tool for technical analysis of financial markets. Like other technical analysis tools it follows the changes in a stock price and indicates how quickly or slowly the stock price is moving. By interpreting these change factors traders can select preferred buy and sell points.
Price Data and Momentum
Moving Average Convergence/Divergence (MACD) is used as an indicator of which direction the price change acceleration is likely to take. MACD looks at the moving average of a stock price over 12 days and 26 days. By plotting these points along an X-Y axis and noting where they cross, one can figure which direction the price acceleration is likely to take. All moving averages tell us where the price has been, not where it’s going. Because MACD uses an exponential moving average it gives more weight to recent changes than earlier ones.
The Signal-Line Crossover Point
The place where the MACD and the average lines cross is the signal-line crossover point. If it is heading upwards when it crosses the average line this could be interpreted as a market entry point. The price is accelerating upwards – an advantageous time to buy. Conversely, if it’s heading downward when it crosses the average, that could be an advantageous time to sell.
What happens when the exponential moving average is the same for 12 and 26 days? Then there is no crossover. This is tricky to interpret since it indicates a change in momentum but does not give a clear indicator of which direction it will take.
Even when the crossover is clear, false positives are possible, especially with respect to the time frames of data collection. Traders must always beware of making a move too soon or waiting until the moment has passed. Judgement is required with MACD as it is with all tools of technical analysis.
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