What is Moving Average Convergence Divergence (MACD) in Trading?
- 11th December 2025
- 01:00 PM
- 7 min read
A moving average convergence divergence (MACD) might sound complicated. But it is one of the easiest technical analysis tools to understand. Introduced by Gerald Appel in the 1970s, an MACD helps you to identify the trend direction and its strength.
Despite all of its benefits, can you solely rely on MACD? This blog clearly discusses what is moving average convergence divergence, how it works, and its limitations.
Understanding Moving Average Convergence Divergence
MACD is one of the most used momentum indicators in technical analysis, which defines momentum and its directional persistence. It primarily calculates the difference between two time period intervals, which are a collection of historical time series.
A momentum oscillator line is computed by subtracting the two moving averages, which is generally referred to as ‘divergence’. An MACD employs moving averages of two different time periods, 12-period and 26-period exponential moving averages (EMAs), which are usually historical closing prices of shares.
The difference between them creates an MACD line, and a 9-period EMA of this line is considered the signal line.
An MACD does not show overbought or oversold levels, but it helps to identify the potential reversals and trend strength. The crossovers between the MACD and signal lines help you find out the actual buying or selling points.
How Does a Moving Average Convergence Divergence Work?
MACD is just like an oscillator that emphasises both the strength and reversal of a trend. To determine the oscillator value, it uses moving averages as inputs. Three moving averages are usually reduced to two by the MACD indicator. To make the oscillator more sensitive to recent price changes, analysts employ the EMAs.
MACD utilises a signal line to generate trading signals, which is a 9-day EMA of the MACD line. This acts as a trigger for buying or selling decisions. If the MACD line crosses above the signal line, it indicates a potential buying opportunity. On the other hand, the crossover below suggests a selling signal.
Moreover, an MACD shows divergences between the momentum and price action, which may signal that trends or upcoming reversals are losing control. All of these insights can help you make more informed decisions according to momentum shifts in the market.
The simplicity of MACD is its main benefit, as its indicators are clearer to beginners. If you are a beginner and want to know more about intraday trading and technical analysis, download the PL Capital Group – Prabhudas Lilladher application.
Moving Average Convergence Divergence Formula and Calculation
To calculate an MACD, you need to subtract the long-term EMA from the short-term EMA. Here is the formula of MACD:
- MACD Line: (12-day EMA – 26-day EMA)
- Signal Line: 9-day EMA of MACD Line
- MACD Histogram: MACD Line – Signal Line
It basically takes 12 and 26 days of EMAs to create MACD lines. A nine-day EMA acts as a trigger to indicate purchase and sale signals. You can interpret the MACD in numerous ways, although traders commonly use crossovers, divergences and rapid rises or falls.
How to Read Moving Average Convergence Divergence?
You must read the MACD on a graph, since it is fundamental for your trading. There are three features of an MACD:
| MACD Line (short-term EMA) | The MACD indicator is computed by subtracting the short-term or 12-day EMA from the long-term or 26-day EMA. It is usually blue in colour. Line MACD = 12-day EMA – 26-day EMA |
| Signal Line (long-term EMA) | It is a 9-day line that is commonly seen in red to show the price activity turns. Signal Line = MACD Line’s 9-day EMA |
| MACD Histogram It swings above and below a zero line, which allows distinguishing the bullish and bearish momentum readings. |
The difference between the MACD line and signal line is the histogram. When the MACD is above the signal line and vice versa, the histogram becomes positive. |
How to Interpret the MACD Indicator?
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Signal Line Crossover
In MACD, a signal line crossover is the most important signal that you may use. The signal line shows the MACD line’s moving average. The obvious crossover of these two lines signals the possibility of a significant price movement. The positions of these lines show whether a crossover is bullish or bearish.
A bullish crossing happens when the short-term EMA crosses above the long-term EMA. On the other hand, a bearish crossing happens when the short-term EMA crosses the long-term EMA.
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Zero Line Crossover
You must look for the overall trend to analyse the indication even more. If it becomes the same as the crossover, the signal’s reliability will increase.
Instead of crossing the signal line, the MACD line crosses the zero level. It shows a bullish trend when it is positive. On the other hand, the MACD shows a bearish trend when it crosses the zero line in a downtrend and becomes negative. The trend becomes stronger when it moves away from the zero line.
Limitations of the MACD Indicator
Although MACD is an excellent tool to identify the price momentum, there are some limitations too:
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False Signals
MACD may produce false signals while moving sideways or in a range-bound market. The reason behind this is that it may produce crossovers which do not reflect the actual trend direction.
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Lag in Price Action
MACD may lag the price action because it relies on historical data and some smoothing techniques. This shows that it may not consider sudden or sharp price movements and can miss indications or trading opportunities.
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Inconsistency
Different settings can influence MACD since traders may consider different periods or parameters for calculating the EMAs and the signal line. This can lead to inconsistencies or conflicting signals in different charts or time frames.
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Prone to Market Volatility
Market volatility directly affects MACD, as it can generate erratic indications when there are rapid price fluctuations. This can result in overtrading.
Final Thought
An MACD is an effective technical analysis indicator that helps you identify trends, analyse price momentum and provide trend reversal signals. It also assists in making buying and selling decisions, by which you can optimise your strategies.
However, you must also be aware of MACD’s limitations. You must remain cautious regarding the influence of different parameter settings.
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Frequently Asked Questions
1. What is the full form of the MACD indicator?
The full form of the MACD indicator is moving average convergence divergence. It helps in spotting changes in a stock’s trends.
2. How to calculate the moving average convergence divergence indicator?
To calculate the MACD, you must subtract the long-term EMA from the short-term EMA. It can take 12 and 26 days of EMA to create MACD lines. Hence, it is calculated as the difference between the two EMA values.
3. What distinguishes MACD from RSI?
The primary difference between the MACD and the Relative Strength Index (RSI) lies in their purposes. While RSI helps to identify the overbought or oversold conditions of an asset, MACD helps to identify the strength, direction, and duration of a price trend.
4. What are the key features of the MACD indicator?
The key features of an MACD indicator are the MACD line, signal line, and MACD histogram.
