Moving Average Convergence/Divergence (MACD) Indicator [Oscillator]

Moving Average Convergence/Divergence (MACD) - one of the most popular technical indicators of the oscillator type among traders, which follows the trend and reflects the ratio of the two moving averages of the price.

MACD indicator is the difference between two exponential moving averages (EMA) with periods of 12 and 26. In order to clearly indicate favorable moments for buying or selling, the MACD indicator chart is also marked with a signal line - a 9-period moving average of the indicator.

It is a standard indicator of trading MetaTrader terminal.

Using the MACD indicator and its trading signals

This indicator is most effective at significant market fluctuations in the trading corridor. The most frequently used MACD signals are crossings of its lines, overbought/oversold conditions and divergences (divergence).

The main rule of trading with MACD is based on the intersection of the indicator with its signal line. When the Convergence/Divergence of Moving Averages falls below the signal line, you should open short positions. When it rises above the signal line - long positions. The signal to buy The MACD crosses the zero line up or down as well.

Sufficiently confident determination of overbought/oversold conditions MACD indicator is also highly valued. If the short moving average is above the long moving average (MACD is rising), it means that price may be overvalued and will soon return to a more realistic level.

If a divergence (divergence) appears between the indicator and the price, it indicates that the trend is about to change. A bullish divergence occurs when the price reaches new highs and the indicator fails to keep up with it. A bearish divergence takes place when the price reaches new minimums, and the MACD fails to keep up with it. These divergences are especially significant in Overbought/oversold zones.

The formula for calculating the MACD indicator

The MACD is formed by subtracting a 26-period exponential moving average from a 12-period moving average. After that, its 9-period simple moving average is plotted on the indicator's chart with a dotted line, which becomes the signal line.

MACD = EMA(CLOSE, 12)-EMA(CLOSE, 26),

SIGNAL = SMA(MACD, 9),

Where:

- EMA - exponential moving average;
- SMA - simple moving average;
- SIGNAL - signal line of the indicator.