What is the definition of Average Convergence Divergence (MACD)?

The MACD - Moving Average Convergence Divergence - is an indicator used in technical analysis for showing trends and momentum. It shows the relationship between two moving averages (i.e. whether they are converging or diverging).

The calculation for the MACD is to subtract the 26-day exponential moving average from the 12-day exponential moving average, and then to use the 9-day moving average as a line to signal whether to buy or sell.

Some of the common ways to use the MACD for trading signals are:

• Crossover - When MACD crosses the signal line, it suggests the trend is changing (i.e. above = upward trend, below = downward trend) and there is momentum in the market
• Dramatic Change - When the MACD changes dramatically this means that the short term moving average is either rising or falling faster than the long term moving average, and this can indicate an over or under traded asset who's price movement will soon reverse.

Learning to read and evaluate the MACD is an essential skill for momentum trading and trading using technical analysis.