Understanding MACD: Technical indicators are a very strong tool that experienced investors use everyday to spot a trend in the market.

Among the hundreds of indicators that are available to investors, MACD is one of the popular ones.

MACD (Moving Average Convergence/Divergence) is a technical analysis indicator used to recognize the changes in

momentum, direction and pattern of a stock’s price.

Do not forget to watch the video for a more detailed explanation about MACD.

Understanding MACD

The MACD is a computation of the difference between two exponential moving averages(EMAs) of closing prices. This difference is charted over time, alongside a moving average of the difference. The divergence between the two is shown as a histogram or bar graph.

Exponential moving averages highlight recent changes in a stock’s price. By comparing EMAs of different periods, the MACD line illustrates changes in the trend of a stock. Then by comparing that difference to an average, an analyst can chart subtle shifts in the stock’s trend.

Since the MACD is based on moving averages, it is inherently a lagging indicator. As a metric of price trends, the MACD is less useful for stocks that are not trending or are trading erratically.

Note that the term “MACD” is used both generally, to refer to the indicator as a whole, and specifically, to the MACD line itself.

How to Read the Graph above:

The graph above shows a stock with a MACD indicator underneath it. The indicator shows a blue line, a red line, and a histogram or bar chart which calculates the difference between the two lines. Values are calculated from the price of the stock in the main part of the graph.
For the example above this means:

MACD line (blue line): difference between the 12 and 26 days EMAs

signal (red line): 9 day EMA of the blue line

histogram (bar graph): difference between the blue and red lines

Mathematically:

MACD = EMA[fast,12] – EMA[slow, 26]
signal = EMA[period,9] of MACD
histogram = MACD – signal

The period for the moving averages on which an MACD is based can vary, but the most commonly used parameters involve a faster EMA of 12 days, a slower EMA of 26 days, and the signal line as a 9 day EMA of the difference between the two. It is written in the form, MACD(faster, slower, signal) or in this case, MACD(12,26,9).

Src: http://en.wikipedia.org/wiki/MACD

Video Explaining MACD:

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