What is MACD?
MACD stands for Moving Average Convergence Divergence and is a momentum indicator used in technical analysis.
MACD is calculated from two different moving averages for an asset price. The primary analysis done by investors using MACD is to compare it with its own moving average, and draw conclusions over the state of the market from that comparison.
The indicator was originally developed by Gerald Appel in the late 1970s.
- MACD is found by subtracting the 26-day moving average from the 12-day moving average.
- The Signal is the 9-day moving average of the MACD.
- Traditionally, the MACD crossing above the Signal indicates that the asset may be due for a corrective downturn - a signal to buy.
- The MACD crossing below the Signal indicates that the asset may be due for a downturn - a signal to buy.
How are MACD and Signal calculated?
What does it mean?
Traditionally, the MACD crossing above the Signal indicates that the asset may be due for a corrective downturn, hence a signal to buy, while the MACD crossing below the Signal indicates that the asset may be due for a corrective downturn, and a signal to sell.
A second indicator looks at the 12-day and 26 day exponential moving averages (EMAs). The 12-day EMA crossing above the 26-day indicator is often seen as a bullish signal, while the 12-day EMA crossing below the 26-day EMA is often seen as a bearish signal.
Finally, traders who look at MACD will look at the direction that the MACD is moving in. When the MACD is below the Signal but converging, this might be an early indicator of an expected upturn. Conversely, when the MACD is above the Signal, but converging, this might be an early warning of an expected downturn.
Example
The below charts for Apple Inc. illustrate some MACD events.
We highlight each of three types of MACD event:
- 4th September 2020 - the 26-day EMA crosses above the 12-day EMA. While the price was already falling, it then continues to fall by around 10% over the next three weeks.
- 28th September 2020 - the MACD crosses above the Signal and proceeds to rise in price by around 15% over the next three weeks.
- 12th October 2021 - the MACD is still above the Signal but that difference is starting to decrease. There is then a price decrease of around 13% over the next three weeks. Note, the way that this indicator is an early warning of the other two indicators also presenting bearish signals a few days later.
Limitations
Obviously, not all assets are the same, and different outcomes can also result in different types of market conditions.
As with all pieces of financial or price data, MACD is risky to use as a standalone signal. It’s wiser to analyse a number of different indicators and use their combination to decide if an asset price will continue to move in its current direction, or if it is likely to reverse.