Moving Average Convergence Divergence (MACD) indicator

The Moving Average Convergence Divergence (MACD) is a technical analysis indicator that measures the difference between two exponential moving averages (EMAs) and helps traders identify potential trend reversals and momentum shifts.

The formula for the MACD is as follows: MACD = 12-period EMA - 26-period EMA

In this formula, the "EMA" refers to an exponential moving average, which gives more weight to recent price data than to older price data.

The MACD indicator is plotted on a chart as a line that fluctuates above and below the zero line. When the MACD line is above the zero line, it indicates that the 12-period EMA is above the 26-period EMA, suggesting that bullish momentum is increasing. Conversely, when the MACD line is below the zero line, it indicates that the 12-period EMA is below the 26-period EMA, suggesting that bearish momentum is increasing.

In addition to the MACD line, the indicator also includes a signal line, which is typically a 9-period EMA of the MACD line. When the MACD line crosses above the signal line, it may indicate a potential bullish trend reversal. Conversely, when the MACD line crosses below the signal line, it may indicate a potential bearish trend reversal.

Traders also pay attention to the distance between the MACD line and the signal line. When the MACD line is far above the signal line, it suggests that bullish momentum is strong. Conversely, when the MACD line is far below the signal line, it suggests that bearish momentum is strong.

Traders may also use the MACD in conjunction with other technical analysis indicators, such as the Relative Strength Index (RSI) or the Bollinger Bands, to confirm potential trend reversals and identify potential buy and sell signals.