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Learn about the MACD Indicator for Profitable Investing

One of the most common technical indicators used to analyze stock charts is the MACD indicator. This indicator shows you a stock’s momentum and stands for “Moving Average Convergence-Divergence.” When doing investing it is always a good idea to look at the MACD chart to help you understand when is the right time to jump in.

How to Read the MACD Indicator

Here’s a screenshot from Stock TickerPicker of a MACD Indicator chart:

MACD

 

 

 

 

There are three parts to this chart:

  • The green line represents the MACD line, which is calculated by subtracting a stock’s 12-day exponential moving average (EMA) from its 26-day exponential moving average. Since exponential moving averages put more weight on recent stock movements than earlier stock movements, and shorter-period EMAs move faster than longer-period EMAs, this line tracks recent momentum vs. longer-trend momentum.
  • The orange line represents the Signal line, which is a 9-day EMA of the MACD line. Yes, this is confusing to understand at first. :-)
  • The blue histogram represents the difference between the MACD line and the signal line.

What the MACD Chart Means

So, how do we make sense of the MACD chart?

If the MACD line is above zero, it means the 12-day EMA is above the 26-day EMA, and thus momentum is positive. The more it moves above zero, the stronger recent stock momentum is. Conversely, if the MACD line is below zero, it means momentum is negative – the stock is trending down. When the MACD line crosses zero (either going up or down) that is a signal that the weight of momentum has shifted – and thus is a buy/sell indicator.

Analysts also look for when the MACD line crosses over the signal line. This is a sign that the MACD is turning, since the signal line is simply a smoothed version (EMA) of the MACD itself.

The strength of the momentum is also represented by this chart. That is where the histogram comes in. If the difference between the MACD and the signal line is very large, that will give you a large histogram reading and it means recent momentum is very strong.

More on using the MACD to make investing decisions in our next post!

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