What is the moving average convergence/divergence?
The moving average convergence/divergence (MACD) is a technical analysis indicator that aims to identify changes in a share price's momentum. The MACD collects data from different moving averages to help traders identify possible opportunities around support and resistance levels.
Convergence means that two moving averages are coming together, while divergence means that they’re moving away from each other.
The MACD indicator is made up of three components:
- The MACD line, which measures the distance between two moving averages
- The signal line, which identifies changes in price momentum and acts as a trigger for buy and sell signals
- The histogram, which represents the difference between the MACD and the signal line
When calculating the MACD, only two lines are taken into consideration: the MACD line and the signal line. The MACD line is created by subtracting the 26-period moving average from the 12-period moving average. The signal line is the 9-period moving average of the MACD.
The MACD is then displayed as a histogram, a graphical representation of the distance between the two lines. If the MACD cuts through the signal line from below, traders could use it as a buy signal and if it cuts the signal line from above, traders might use it as a sell signal.
