Moving Average Convergence Divergence is an technical analysis indicator developed by famous market technician Gerald Appel.
It is used by traders to determine when to buy or sell a security, based on the interaction between a line constructed from two moving averages and a "trigger line."
How it Works: The MACD line is constructed from two moving averages -- a 12-period, or faster moving average, and a 26-period, or slower moving average. The MACD calculation subtracts the 26-period from the 12-period to create a single line. This is known as the main line.
The next step is to compute the nine-period exponential moving average of the main line. This line is then called the trigger line. It is the interaction between the main line and the trigger line that certain types of trading signals are generated.
Also note that the MACD is plotted on a chart with zero as the equilibrium. The amount of divergence between the main line and trigger line is also plotted on this chart.
During a period when there is a strong trend, the two MACD lines will grow further apart (divergence). During sideways consolidation, they come closer together (convergence), often crisscrossing one another several times.
The MACD is best used in a market that is trending either higher or lower. This way there is less criss-crossing between the main line and the trigger line, and the MACD's signals are clearer
