Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “MACD”.
Technical analysis indicators condense price information, providing analytical insight and trading signals which may not be obvious on a price chart. The Moving-Average-Convergence-Divergence known as MACD indicator fluctuates above and below zero, highlighting both the momentum and trend direction of a stock. Utilizing the MACD effectively requires understanding how it works, its functions and applications, as well as its limitations.
Gerald Appel developed the MACD in the 1970s, and it is one of the most popular indicators in use today. Traders use the MACD for determining trend direction, momentum and potential reversals. It is used to confirm trades based on other strategies, but it also provides its own trade signals.
Two lines compose the MACD: the MACD line and Signal line. These lines move together, except the MACD moves faster as the Signal line is a moving average of the MACD line.
The MACD Histogram that oscillates above and below zero shows the extent to which the MACD line is above or below signal line. The histogram provides a short-term view on recent momentum and direction. When the histogram is above zero, recent movement has been higher; below zero and the recent momentum was down. The greater the histogram value the greater the momentum of the recent move.
The Histogram is not always shown as part of the MACD indicator as many traders prefer to focus on the how the two lines are interacting. These two lines are the source of most MACD strategies and price analysis.
By Barry Norman, Investors Trading Academy