What is MACD
MACD is one of the most popular technical indicators. It was invented by Gerald Appel in the 1970's. While it is widely known as MACD, its full name is Moving Average Convergence-Divergence.
MACD is based on two exponential moving averages of closing price with different period lengths. MACD measures how close or far the two moving averages are and what is the tendency in their distance – whether they are getting closer (convergence) or further away from one another (divergence).
MACD in Charts and MACD Line
On charts MACD is typically displayed as two lines (some people prefer to display the first one as histogram to better distinguish between the two). The first line plots the value of the MACD itself and it is called the MACD Line. It is the distance between two exponential moving averages.
How to Calculate MACD
Calculation of the MACD line's value is straightforward. Take two exponential moving averages (EMA) of closing price with different period lengths and subtract the value of the longer period average from the value of the shorter period average:
MACD line = shorter EMA – longer EMA
MACD Is an Oscillator, But...
We can say MACD is an oscillator, as it oscillates around zero. But unlike most other oscillators, MACD has no (explicit) overbought and oversold areas. It also doesn't have a percentage or standardized scale (like 0 to 100 or -100 to 100).
MACD is measured in the same units as the underlying market's price (dollars, euros) and theoretically there are no limits on the values MACD can reach, as the two exponential moving averages can in theory move infinitely far away from one another. In reality MACD tends to come back to zero relatively soon.
MACD Line Values and What They Mean
The MACD line is:
- at zero when the two exponential moving averages are just crossing and their values are equal.
- positive and rising when the shorter EMA is above the longer EMA and is moving further away from it (market's bullish momentum is accelerating).
- negative and falling when the shorter EMA is below the longer EMA and is moving further away from it (market's bearish momentum is accelerating).
- positive but falling when the shorter EMA is above the longer EMA, but they are converging (the bullish momentum in the market is fading).
- negative but increasing when the shorter EMA is below the longer EMA, but they are converging (the bearish momentum in the market is fading).
MACD Signal Line
The second line displayed in MACD charts is called the Signal line and it is nothing more than another exponential moving average – but this time moving average of the MACD line and not price.
Signal line = EMA of MACD line
With MACD you need to set three parameters:
- period of the shorter EMA of price;
- period of the longer EMA of price;
- period of the EMA of MACD, used for the Signal line.
The most widely used values for these three are 12, 26, and 9 respectively – this is what you will most likely find as default in your charting software.
Sensitivity of MACD to Different Settings
Changing these parameters does not play very significant role (unless you change it to something like 3, 60, and 20 of course). Changing the difference, or rather the ratio of the first two parameters (longer and shorter price EMA period) usually has the biggest impact on the looks of the MACD, as it directly affects the behaviour of the distance between the two exponential moving averages (the MACD line value). The greater the difference between the two periods, the more volatile the MACD will look.
You may also encounter the term MACD Histogram. It doesn't mean the MACD line being displayed as histogram. It is a different indicator, derived from the relationship between the MACD line and the Signal line. MACD Histogram is calculated by subtracting the signal line from the MACD line, therefore it is something like MACD-Signal line Convergence-Divergence. See more details about MACD Histogram.