The MACD is an indicator used in technical analysis both to detect trends and trend changes and to know if the price of an asset is overbought or oversold. This indicator signals the difference between a fast (short period) exponential moving average (EMA) and a slow (longer period) EMA.
Its name comes from the English acronym for "Moving Average Convergence Divergence", which means convergence / divergence of the moving average. It is an indicator included in the category of oscillators, like the RSI and the ADX. It was developed by Gerald Appel in the 1970s.
Components of the MACD
It is made up of three components:
- Macd.
- Histogram.
- Signal or signal.
This investment tool measures the convergence or divergence of two exponential moving averages of different number of periods, a fast average of 12 that more easily detects noise in prices and a slower average of 26.
Both move with the price formation of a financial asset, and are generally applied to its closing prices. The The difference between these two means is what is known as Macd. The signal line or signal is an exponential average of the MACD and generally used with nine periods. Lastly, the histogram is the difference between the Macd and the signal. Both the two averages, MACD and the signal line or signal move around a zero line.
MACD signals
The MACD allows us to detect in which zone we are, if the price is overbought or oversold, although to carry out a good technical analysis it is necessary to combine it with more indicators. Using the indicator through divergence detection and modulating the parameters through thorough analysis may be the most powerful way to use it.
There are different ways of representing the Macd and the interpretation of the buy and sell signals that they give.
You can see more information about their interpretations and an example in:
Ways to interpret the behavior of the Macd
MACD example
In the next picture we can see two graphs, the first is the price of a share of Iberdrola for just over a year. In the lower half we see the chart of the Macd indicator, which is usually drawn below the price chart. The Macd indicator is represented by the solid line, while the signal line is the dashed line.