MACD stands for Moving Average Convergence Divergence. This is a mathematical tool that traders use to predict fluctuations in the stock market or other markets involving financial instruments. The MACD is comprised of two different Exponential Moving Averages, one long term and the other short term, for the same stock. An exponential moving average is a moving average where the earlier dates in the moving average are weighed less than those that are more recent.
When creating a MACD the longer Exponential Moving Average is usually around 26 days while the shorter Exponential Moving Average is 12 days. The two EMAs are plotted on a graph with the resulting EMAs hovering close to each other around zero. The MACD on a chart consists of a MACD signal line, the Exponential Moving Average and the MACD histogram. The MACD histogram is a bar graph that charts the differences, positive or negative, in value between the 26 day EMA and the 12 day EMA.
MACD is often used by traders to reach determinations on when to get involved with a stock or when to exit from trading in that asset. When the short term, 12 day, Exponential Moving Average rises above the slower moving long term, 26 day, Exponential Moving Average it is called a convergent movement. This is often an indicator that positive trends show it is a good time to invest in that particular asset. When the short term Exponential Moving Average is lower than the long term exponential moving average then you have a divergent movement. This trend is usually used as an indicator of it being a good time to sell the asset .
Studies seem to indicate that the MACD is not a reliable tool for entry or exit signaling, like it is supposed to. Many times it is found that the MACD will remain steady and upon a slight divergence it will indicate an exit signal where in reality it is just a minor lull that is, in fact, a minor bump prior to a major up tick.
