Moving Average Convergence Divergence (MACD)

The moving average convergence divergence, or MACD, is an oscillating indicator, but it does not move within a pre-defined range. The MACD is based on the relationship between two price-based moving averages. It is also plotted as both two lines and a histogram. The direction and height of the histogram is based on the direction and separation of the two MACD lines.

There are two popular setups for the MACD. The first is based on calculations using three time frames: a 26-period, a 12-period, and a 9-period time frame. The second is based on calculations using three different time frames: a 17-period, an 8-period, and a 9-period time frame. The MACD based on longer time frames is less volatile than the MACD based on shorter time frames and will give fewer buy and sell signals.

The most common buy and sell signals generated by the MACD are crossovers. A MACD crossover occurs when the two MACD lines cross. You can see this illustrated by both the MACD lines and the histogram, as on the Hovnanian Enterprises (HOV) chart. When the lines cross, the histogram will also cross the flat, horizontal signal line. When the lines and histogram cross up, this is a simple buy signal. When the lines and histogram cross down, this is a simple sell signal.

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