Definition of Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence or MACD is one of the most popular financial tools which was created in the 1970’s by Gerald Appel. Moving average convergence divergence or MACD indicates the difference between two moving averages between two time periods of a security’s price. This helps to understand the momentum and strength of the security.
Moving Average Convergence Divergence or MACD is calculated by taking two moving averages of different time intervals and a momentum oscillator line is obtained by subtracting the one with long time period from the one with short time period.
Exponential moving averages or EMA are considered for this and the only rule is to choose one with a shorter period and one with a longer period. So usually Moving Average Convergence Divergence or MACD is calculated by subtracting a 26 period exponential moving averages (EMA) from the 12 period exponential moving averages (EMA).
What is the formula used to calculate Moving Average Convergence Divergence (MACD)?
Moving Average convergence divergence or MACD is calculated by subtracting long term exponential moving averages (EMA) from short term exponential moving averages (EMA). The formula to calculate Moving average convergence divergence or MACD is as follows:
MACD = 12 period EMA − 26 period EMA
Moving average convergence divergence or MACD is represented on a graph by using a baseline. Whenever the MACD is far from the baseline above or below, it indicates that the difference between two exponential moving averages (EMA) is large.
Investors use this graph to identify when the bearing or bullish momentum is high.
