MACD

MACD, short for moving average convergence divergence, is a widely used indicator that combines trend and momentum information into a single tool, built from the relationship between two exponential moving averages of a stock's price.

The formula is:

The MACD line itself measures the gap between a faster and a slower moving average, widening when the faster average pulls further ahead of the slower one, a sign of strengthening momentum in that direction, and narrowing as the two averages converge, a sign that momentum is fading. The signal line smooths the MACD line further, and the difference between the two, often plotted as a histogram of bars, is used to gauge whether momentum is accelerating or decelerating in real time.

Traders use MACD in a few main ways. A crossover, when the MACD line moves above the signal line, is often read as a bullish signal, while the MACD line moving below the signal line is read as bearish. The indicator crossing above or below the zero line is used to gauge the broader trend, above zero suggesting the shorter moving average is above the longer one and the trend is generally bullish, below zero suggesting the opposite. Traders also watch for divergence, when a stock's price makes a new high or low that MACD fails to confirm with a matching new high or low, which is often treated as an early warning that the current trend is losing underlying strength.