The MACD (“Moving Average Convergence/Divergence”) is a trend following momentum indicator that shows the relationship between two moving averages of prices. MACD uses exponential moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. MACD is a centered oscillator.

The MACD is the difference between a 26-period and 12-period exponential moving average. A 9-period exponential moving average, called the “signal” (or “trigger”) line is plotted on top of the MACD to show buy/sell opportunities

Usage:

The MACD proves most effective in wide-swinging trading markets. The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero. The MACD is also useful as an overbought/oversold indicator.