What is the MACD?
The MACD technical indicator is a momentum oscillator that consists of three elements, the MACD line (typically blue), a signal line (typically orange), and a histogram. These are charted around the horizontal axis known as the baseline.
Moving averages are lagging indicators meaning that they are based on past prices.
MACD Line
The MACD line is calculated by subtracting a long-term exponential moving average (EMA) from a shorter-term EMA. Typically the values used are the longer EMA is 26 bars, while the shorter EMA is 12 bars.
Signal Line
The purpose of the signal line is to smooth out the sensitivity of the MACD line. The signal line is then calculated as the EMA of the MACD line, typically using a value of 9 bars.
Histogram
The Histogram graphically plots the difference between the MACD line and the signal line as a bar chart. Meaning that as these two lines separate, the histogram bars get bigger, which is called a MACD divergence. Likewise, as they get closer together, the bars get smaller, which is called MACD convergence. Hence the name Moving Average Convergence Divergence.
What is the MACD used for?
The MACD line reacts to price movements faster than the signal line.
Because this is the case, when a new trend occurs the MACD line will eventually catch up and cross the signal line. After the crossover happens, the two lines will diverge and move away from each other, indicating a new trend has formed. Therefore, traders can use the MACD indicator to look for divergence to forecast changes in price trends.
