MACD indicators are formed by what is known as the Moving Average Convergence Divergence, or MACD, method of technical analysis, which is designed to spot the price trends of investment securities and send buy and signals to investors. The MACD is formed when a 26-day moving average, which is the average price of a security that changes as time passes, is subtracted from a 12-day moving average. When charted, an MACD that moves from negative to positive creates a buy signal, while the opposite movement gives a sell signal. In addition, the signal line, which is a moving average of the MACD itself, and current prices of the security can be used in conjunction with the MACD as solid MACD indicators.
A moving average, which is at the heart of the MACD, is created by taking the average price of a security over a period of time. That average changes as time passes and new prices replace old ones in the computation. By comparing a 12-day, fast moving average and a 26-day, slow moving average, the MACD is formed, showing whether the current trend is positive or negative. Other MACD indicators show up when charts are constructed.
The easiest of the MACD indicators to spot occurs when the two moving averages are charted. These two lines will intersect when the MACD is zero. If the fast line goes past the slow line in an upward direction, it indicates positive MACD and an upward price trend. When the fast line goes through the slow line going down, the MACD is negative and the price is trending downward.
Another of the common MACD indicators is the signal line. The signal line is created by taking a 9-day moving average of the MACD itself. Once this signal line is charted along with the MACD, the two lines will intersect and weave in different directions. When the MACD goes above the signal line, it shows a positive trend. If it goes below, the price is trending negative.
Using current prices of the security in question along with the MACD shows MACD divergence, which is one of the most useful MACD indicators for showing trend reversals. When the security price sinks to a low price that is comparatively lower than the MACD's lowest low, investors should be aware that the downward trend could be primed for reversal, indicating that they should buy. By contrast, when a higher high for the security is accompanied by a lower high from the MACD, an upward trend may be reversing, telling investors that they should sell.