MACD Line and MACD Signal Line
Moving Average Convergence/Divergence oscillator (MACD) is a simple and effective momentum indicator. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, the MACD offers the best of both worlds: trend following and momentum. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge.
It calculates the difference between a 12 day and 26 day EMA using closing prices. A 9-day EMA of the MACD Line is plotted with the indicator to act as a signal line and identify turns.
Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals.
Signal line crossovers are the most common MACD signals. The signal line is a 9-day EMA of the MACD Line. As a moving average of the indicator, it trails the MACD and makes it easier to spot MACD turns. A bullish crossover occurs when the MACD turns up and crosses above the signal line. A bearish crossover occurs when the MACD turns down and crosses below the signal line.
Centerline crossovers: MACD above zero for a sustained period of time indicates an uptrend, and below zero, a downtrend. Potential buy signals occur when the MACD moves above zero, and potential sell signals when it crosses below zero.
Trend traders also watch for divergences between MACD trends and price trends as a sign of a potential upcoming reversal and end of the current trend.