MACD
Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of an asset's price.
Plain-English Meaning
MACD helps traders see changes in the strength and direction of a trend. It uses two flowing lines and a bar chart (histogram) to visually display whether buyers or sellers are gaining momentum.
Why It Matters
Traders look for moments when the MACD lines cross each other. A bullish cross suggests upward momentum is building, while a bearish cross warns that downward pressure might be increasing.
Simple Example
When the fast MACD line crosses above the slow signal line while below zero, traders often interpret it as a sign that a downtrend is ending and an uptrend is beginning.
This educational example uses selected assumptions for reference calculation purposes. Real conditions may vary by broker, exchange, or instrument.
Beginner Mistake
Trading every MACD crossover blindly. In sideways or choppy markets, the MACD lines will cross repeatedly, leading to "whipsaws" and a series of false signals.
Note: MACD is a technical indicator and may lag price action. It can give false readings, especially in choppy or low-momentum markets.