The Moving Average Convergence Divergence (MACD) oscillator is quite possibly the most popular technical analysis tool. With that being said, with popularity comes setbacks. The MACD will show up often over the course of any technical analysis and consequently will produce a higher number of false signals. For this reason, investors are warned to confirm MACD signals with other analysis before committing to a trade.

MACD Defined

In spite of its long name, the MACD is one easiest oscillators to understand. The way this technical analysis tool works is that it takes the difference between the 26-day and 12-day exponential moving averages (the MACD) and plots it against the 9-day exponential moving average. Bullish and bearish signals are triggered when the MACD touches or crosses the 9-day line.

MACD Trading Signals

A bullish trading signal is produced when the MACD crosses above the 9-day line. This 9-day line is also called the base line or zero. Alternately, a bearish signal is generated when the MACD crosses below he base line.

Ideal Uses for the MACD

This technical analysis tool works best in strongly trending markets. Since the MACD will show up often, investors are urged to determine the overall mood of the market and are warned against relying too heavily on this tool if the market is indecisive. Again, other analysis is strongly recommended in all caes before making a trade commitment.

Two More Ways to Trade the MACD

Another useful way to trade the MACD involves indentifying overbought and oversold conditions for the security. One use would see the MACD moving sharply away from the base line. Supposing it rises sharply, the signal would be that the security is overbought and is likely to correct. Another way to trade this technical analysis tool involves watching the MACD to determine whether it is making new highs and new lows while the underlying security is not. This kind of divergence is rather significant as it indicates that the underlying security will also reach new highs and new lows.


To summarize the MACD can be used to generate buy and sell signals on an underlying security. Possibly the most popular technical analysis tool, the MACD can also help investors isolate overbought and oversold levels. Like any other technical analysis tool, the MACD should never be used as a stand-alone tool when making trading decisions; other tools and analysis should be used to confirm or refute MACD signals.