What Is MACD? - Moving Average Convergence/Divergence | My Espresso

What is MACD (Moving Average Convergence Divergence)?

MACD, abbreviated for Moving Average Convergence Divergence, is a momentum-based trend-following indicator representing the connection between two EMAs (exponential moving averages) of the price of a security. If you subtract the 12-period EMA from the 26-period EMA, you’ll be able to calculate the MACD line.

Published on 17 January 2023

MACD line is the outcome of such a calculation. The MACD line comprises a nine-day EMA called the signal line. It is subsequently devised on the MACD line’s top part, which can operate as an indication for sell or buy signals.

Traders can sell the security if the MACD line exceeds the signal line. And when the MACD line reaches above the signal line, they can buy the security. One can interpret the MACD indicators in numerous ways, but rapid falls/rises, divergences, and crossovers are the most common methods.

MACD Indicator: What Makes Them So Helpful?

Now that you know ‘what is MACD,’ take a look at what makes it so valuable. It’s beneficial because it can be utilized in two approaches: momentum and trend following.

You may already know that the MACD line, also called the faster line, distinguishes between two steadily flattened moving averages of closing prices (typically the last 12 and 26 weeks or days). The signal line also called the slower line, is usually a nine-period exponentially smoothed MACD line average.

You must be aware that the creator initially suggested one set of numbers for selling signals and another set for buying them. But what we get to use are 12, 9, and 26, which are established as default values for every instance.

MACD Indicator: How To Use It?

Here are the types of signals generated by the MACD:

1. The Signal Line Crossovers

The MACD has an EMA, which is nothing but the signal line. When the MACD crosses above this signal line, the market is regarded as a bull market. Meanwhile, when the MACD drops and crosses underneath this signal line, the crossover is called a ‘bearish crossover,’ and the market is considered bearish.

2. The Centre Line Crossovers

If the MACD surpasses the zero line and rises above, the market trend is considered bullish. During that time, a buy signal will form. On the other hand, when MACD drops down and goes below the zero line, and enters the negative, the trend is bearish, and the process is called a bearish centerline crossover. In this market trend, a sell signal will form.

3. Divergence

It occurs whenever the MACD fails to follow the price action deviation. For instance, if the price action hits a new low but the MACD fails to follow it and ensures a new low, it is considered a bullish divergence. Likewise, if the price hits a new high and the MACD fails to follow it and makes a new high, the market is bullish.

Nevertheless, MACD indicators are ineffective in this scenario as they won’t function in a range-bound market. Additionally, within a shorter span, there can be an occurrence of incomprehension. For instance, one can witness the happening of a steep price rise even if there’s a negative crossover. Thus, the events will need to be watched over for a prolonged period to predict real-time outcomes.

MACD (Moving Average Convergence Divergence) Calculation: Learn The Formula

You can calculate MACD (Moving Average Convergence Divergence) by subtracting the short-term EMAs (exponential moving averages) from the long-term EMAs. The formula for MACD calculation is:

MACD = 12 Period EMA (Exponential Moving Average) - 26 Period EMA (Exponential Moving Average)


MACD, or Moving Average Convergence Divergence, is typically demonstrated by leveraging a baseline. When the MACD is far below or above the baseline, it signifies that there’s a large difference between the two EMAs. Investors utilize this graph to determine when the bullish or bearing momentum is high.

Learn The MACD-Related Trading Rules

Whenever there’s an alteration in the stock market tide, it is determined by the intersection between the Signal lines and the MACD. When you trade in the traverse direction, it implies that you’re operating as per the market flow.

  • When the faster MACD trend line surpasses the Signal line (slow line), it indicates a buying signal. Put a protective stop underneath the new minor low by going long in that case.
  • When the faster MACD trend line surpasses the Signal line (slow line), it indicates a selling signal. In that case, put a stop above the new minor high by going short.

Ending Note

Traders best utilize MACD with daily data. It is a highly beneficial moving-average type tool. So, get the most out of this guide and earn more profits in the stock market with MACD trading. So, keep reading our blogs for more insightful stock market-related content.

Chandresh Khona
Team Espresso

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