MACD (Moving Average Convergence Divergence
One of the more popular technical indicators used by traders on Ayrro is the MACD. Pronounced “mack-dee”, this simple indicator has a proven track record since its inception in 1979. Rather than being a moving average itself, its value is actually calculated by taking the difference between two averages of different time lengths: a short period and a long period. Let’s take a closer look into it.
What is a moving average?
Finding the average of a group of values is easy, just sum up the values and divide by how many values you added together. For instance, if you wanted to find the average closing price of ticker symbol TSLA over the past month, you could easily calculate that value by summing up the closing prices after each of the 30 days and then dividing by 30. This is a static number, but let’s say you wanted something more dynamic. What if you wanted to find the average closing price on a rolling 30-day basis? This is known as a moving average, because the average value keeps moving, or updating, with every new day. Only the most recent price data is included in the calculation, giving traders a more up-to-date interpretation of the stock’s average price.
How is MACD Calculated?
It’s important to remember that MACD is not a moving average in and of itself, but rather the difference between two moving averages, specifically, the longer time period moving average will be subtracted from the shorter time period. For instance, two popular time periods to use are a 26-day and 12-day. So, to calculate the MACD, you would average the closing prices of the past 26 days and subtract that from the average closing prices of the past 12 days, or MACD = EMA(12) – EMA(26).
Wait, what’s EMA? EMA stands for Exponential Moving Average. This is a variation to a moving average, the only difference is that it puts a little more weight on the most recent data points. We’ll cover that more in our EMA blog post, but for now, don’t get confused, it’s just a slightly alternative way to calculate a simple moving average.
Extra Credit: Another line that is charted along top of the MACD line is its signal line. The signal line is the EMA (moving average) of the MACD line itself! That means it’s the moving average of the difference between two other moving averages (moving average Inception). This signal line has some important implications, but we’ll save those for when we dive into the MACD Histogram.
What does MACD mean?
The MACD, like many other technical indicators, is used to identify trends. Traders want to know whether the recent price increase or decrease will continue or whether it was just random noise. Values above zero for the MACD mean that the stock’s price has recently been trending higher than its longer term average, meaning the stock’s on the rise. Negative MACD values indicate the stock has been trading lower than its longer term average, or a recent sell-off has occurred. A trading strategy used by some is to buy when the MACD crosses above 0 and sell when it drops below 0.