MACD Formula Defined - What Is MACD Trading?

Short term traders and all of the financial markets seek to exploit the market using various trading methods, platforms and indicators. One of the more popular indicators employed by traders is the MACD or Moving Average Convergence Divergence indicator. The MACD formula relies on moving averages which sway back and forth over a zero centerline which identifies this indicator as a oscillator. Although it is a lagging indicator, it is utilized quiet often by veteran traders across all financial markets as tool to determine the current trend of the market.

MACD Formula

Although the settings can be changed, the most widely used MACD formula is the twenty six day and twelve day Exponential moving averages. The relationship between these two exponential moving averages provides the trader with important information about market direction. As the MACD is a lagging indicator, it doesn’t provide absolute information, however it does provide a powerful indication of what is a probable.

The 12 day Exponential Moving Average or EMA, is faster than the 26 day moving average. Depending on the time frame used by the trader, closing prices are utilized to form these EMA’s. On most MACD charts, a third line is added which acts as a trigger for potential trade entry or exit. This third line is usually a 9 day EMA and it’s plot is along side the other two EMA lines.

MACD Crossover

Once the trader becomes familiar with the MACD formula, he will learn the term MACD crossover which it the money-maker for most traders since the MACD crossover signals, in most cases, something is about to change on the trading landscape. A MACD bullish crossover is happening when MACD moves above it’s nine day EMA and bearish crossover occurs when the MACD moves below it’s nine day EMA.

On most trading platforms, the 12 day EMA is represented by a thin blue line while the 26 day EMA is represented by a thin red line to easily identify the differing lines. The 9 day EMA is most often shown as a thick black line on the MACD chart.

MACD Signal

On most charting platforms, the MACD indicator will reside on the lower part of the screen, showing two lines. One is the MACD line, or both the 12 day EMA and 26 day EMA combined and the 9 day EMA as a separate line for purposes of clarity. Traders use varying types of charts, for example a bar chart or a Japanese candlestick chart, which will have individual lines representing the 12 day and 26 day EMA with the 9 day EMA omitted as it resides only on the MACD indicator on the lower portion of the screen

Traders know when a crossover occurs, this is a MACD signal alerting them that a possible trade set up may be about to occur, so the trader should take appropriate measure to focus on possible trade execution.

The MACD formula is widely employed by traders in stocks and emini signals for futures markets as well as other markets to great effect. Having been proven a reliable indicator, the MACD formula is one way of adding to the trading arsenal and capitalizing on trading success. Learn more about chart settings.