Chapter 1 How Does MACD Work?
What is MACD?
MACD, short for Moving Average Convergence/Divergence, is a simple oscillating trend and momentum indicator that was developed by Gerald Appel.
It shows the convergence and divergence of two exponential moving averages (EMAs) by calculating the difference between the two EMAs. A signal line, which is an EMA of the MACD is added to indicate bullish and bearish conditions. Because of its construction, the MACD is both a trend indicator as it uses trend indicating moving averages (MAs) and a very effective momentum indicator. However, the MACD can be plotted as two lines that fluctuates above and below a zero line, or as a MACD histogram indicating the distance between the MACD and the signal line. When plotted as a line, the MACD has no upper or lower limit and thus does not indicate overbought or oversold conditions.
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 the price.
The histogram, which represents the difference between the MACD and the signal line
How this indicator works?
MACD crossing above zero is considered bullish, while crossing below zero is bearish. Secondly, when MACD turns up from below zero it is considered bullish. When it turns down from above zero it is considered bearish.
When the MACD
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