MACD - Moving Average Convergence/Divergence

This indicator uses three exponential moving averages, a short or fast average, a long or slow average and an exponential average of their difference, the last being used as a signal or trigger line. To fully understand the basics of MACD you must first understand simple moving averages. The Moving Average Convergence/Divergence indicator measures the intensity of public sentiment and is considered by Gerald Appel, its developer, to be a very good indicator signaling market entry points after a sharp decline. This indicator reveal overbought and oversold conditions and generates signals that predict trend or price reversals. It provides a sensitive measurement of the intensity of public sentiment and can be applied to the stock market, to individual stocks or to mutual funds. In some instances, it can provide advance warning of reversals allowing you to buy into weakness and sell into strength.

The Moving Average Convergence/Divergence indicator (MACD) is calculated by subtracting the value of 26-day exponential moving average from a 12-day exponential moving average. A 9-day exponential moving average (the "signal line") is automatically displayed on top of the MACD indicator line.

The basic MACD trading rule is to sell when the MACD falls below its 9-day signal line. Similarly, a buy signal occurs when the MACD rises above its signal line.