MACD

The Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that displays the relationship between two exponential moving averages (EMAs) of a security’s price. It is calculated by subtracting the 26-period EMA from the 12-period EMA, resulting in the MACD line. A 9-period EMA of the MACD line itself, called the 'signal line', is then plotted on top of the MACD line, acting as a trigger for buy and sell signals.

For a retail trader, MACD helps identify potential shifts in momentum and trend reversals, but it is a lagging indicator. Signals, such as MACD line crossovers with the signal line or the zero line, indicate past price action. Relying solely on MACD without other confirmations can lead to false signals in ranging markets. Traders often combine MACD with price action analysis or other indicators to improve signal reliability and manage risk.