MACD (Moving Average Convergence Divergence)

Understanding MACD

The Moving Average Convergence Divergence (MACD) is one of the most popular and versatile technical indicators. It shows the relationship between two exponential moving averages and helps identify changes in trend strength, direction, and momentum.

The Three Components of MACD

1. MACD Line — The difference between the 12-day EMA and the 26-day EMA. When the MACD line is positive, the short-term average is above the long-term average (bullish). When negative, the opposite is true (bearish).
2. Signal Line — A 9-day EMA of the MACD line. This acts as a trigger for buy and sell signals.
3. Histogram — The visual difference between the MACD line and the signal line. When the histogram bars are growing, momentum is increasing. When they are shrinking, momentum is fading.

MACD Trading Signals

• Bullish signal — MACD line crosses above the signal line. This suggests upward momentum is building.
• Bearish signal — MACD line crosses below the signal line. This suggests downward momentum is increasing.
• Centreline crossover — When the MACD line crosses above zero, the short-term trend is shifting bullish. Below zero, it is turning bearish.

MACD Divergence

Divergence is one of the most powerful MACD signals. It occurs when the price and MACD move in opposite directions:

• Bullish divergence — Price makes a lower low but MACD makes a higher low. This suggests selling pressure is weakening and a reversal upward may be coming.
• Bearish divergence — Price makes a higher high but MACD makes a lower high. This warns that buying momentum is fading despite the rising price.

MACD on the NSE

On Stockr's charts, the MACD indicator is available for all listed NSE stocks. For a stock like KCB, watching for MACD crossovers on the daily chart can help time entries. If KCB's MACD line crosses above the signal line while the histogram bars are growing from negative to positive territory, it is a strong indication that a new uptrend may be forming.

The MACD is often called the "one indicator to rule them all" because it captures both trend and momentum in a single visual tool.