Moving Average Convergence Divergence(MACD) is a market indicator on trending momentum to show the relationshops between two moving averages of a security’ price.
The MACD is calculated bey subtracting the long-term Exponential Moving Average(EMA) from the short-term EMA.
The display of MACD is the MACD line, and a nine-day EMA of the MACD called the ‘signal line’, is then plotted on the top of MACD line. It functions as a trigger of buying or selling. Traders could buy the security when the MACD crosses above the signal line and sell the security when the MACD crosses below the signal line.
MACD is calculated by substracting the long-term EMA from the short-term EMA.
MACD triggers technical signals when it crosses above to buy or below to sell its signal line.
The speed of crossovers is also taken as a signal of the market to overbuy or oversell.
MACD helps investors understand whether the bullish or bearish momentum the market is.
The MACD has a positive value whenever the short-term EMA is above the long-term EMA and a negative value when the short-term EMA is below the long-term EMA.
The more distant the MACD is above or below it’s baseline, the growing of distance between two EMAs is faster.
As the following chart shows:
MACD is often displayed in a histogram foramt, which graphs the distance between the MACD and its baseline.
If the MACD is above the baseline, the histogram will be above the MACD’s baseline, otherwise the histogram will be below the MACD’s baseline.
Traders use the MACD histogram to identify when bullish or bearish momentum is high.
The relative strength indicator(RSI) aims to signal whether a market is considered to be overbought or oversold in relation to recent price levels.
The RSI is an oscillator that calculates average price gains and losses over a given period.
MACD measures the relationship between two EMAs, while the RSI measures price change in relation to recent price highs and lows.