Two averages, one line between:MACD shows where momentum's been.
Moving average convergence divergence: a momentum indicator that plots the distance between two exponential moving averages of a price, a faster and a slower one, alongside a smoothed signal line.
Because it is built from averages of past prices it turns after the price has turned, and its crossings can be followed by a move in either direction.
In plain words
MACD stands for moving average convergence divergence. It takes two exponential moving averages of price, which are averages that give more weight to recent prices, one faster and one slower, and plots the distance between them as a line. A second, smoothed line called the signal line is drawn alongside it.
See it move
Fast average and Slow average are drawing apart
Why it matters
Chart readers use it to describe whether recent price movement is gaining or losing speed relative to the longer run. Because it is built from averages of past prices it turns after the price has turned, and in sideways markets its crossings are frequent and often reversed.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
With the common settings the fast average covers 12 periods and the slow one 26; on an invented chart they stand at 1.1040 and 1.1010.
- 1MACD line1.1040 − 1.1010 = 0.0030
- 2The signal line, a 9-period average of the MACD line, stands at 0.0020
- 3Histogram0.0030 − 0.0020 = 0.0010
MACD is positive, so the fast average is above the slow one, and it is above its signal line, so the gap is larger than its own recent average.
A common mistake
A MACD crossing is sometimes treated as an instruction. It restates what the price has already done, with a delay, and the same crossing can be followed by a move in either direction.
Check yourself
Learn more
- Academy lessonMoving averagesSimple and exponential moving averages, how each is calculated, what the golden cross and death cross describe, and how the period changes behaviour.
- Academy lessonRSI and MACDHow the Relative Strength Index and MACD are constructed, what overbought, oversold, divergence and crossovers mean, and where signals mislead.
Educational information, not investment advice or a recommendation to trade.