MACD is an acronym for Moving Average Convergence Divergence. This tool is used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish.
With an MACD chart, you see two numbers that are used for its settings. The default values are 12, 26, and 9.
- The first, 12, is the number of periods that is used to calculate the faster moving average.
- The second, 26, is the number of periods that are used in the slower moving average.
- And the third, 9, is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.
There is a common misconception when it comes to the lines of the MACD. The two lines that are drawn are NOT moving averages of the price. Instead, they are the moving averages of the DIFFERENCE between two moving averages.
The histogram shows the faster moving average, and the signal line shows the slower moving average.
When the histogram is above the signal line, that is a bullish signal. When the histogram is below the signal line, that is a bearish signal.