Moving averages can be tweaked:- by taking two moving averages over different time periods and subtracting one from the other, we end up with a momentum oscillator.

Two different time periods, we’re going to look at the difference between them, ie. see whether they converge or diverge – and the most popular formula for MACD is the difference between 26-day and 12-day exponential moving averages.
So we subtract the longer 26-day moving average from the shorter 12-day moving average and get a figure that can be positive or negative, thus forming a line that oscillates above and below zero – a centred or centered oscillator

Usually, a 9-day EMA of the MACD is also plotted alongside – the signal or trigger line (the purpose of this will become clear in a moment…)
Again, the charting software will be doing this for you and what it produces might look something like this. The MACD appears in the box below the chart as the green line and its 9-day EMA is the purple line.

So how to interpret?
MACD positive, ascending – that is, the faster moving average > the slower moving average and with greater rate of change – positive momentum is increasing = a likely bullish period.

And MACD is negative, descending – just the same, only in mirror image – negative momentum is increasing = a likely bearish period.

It’s also all about crossovers – the red histogram represents the difference between MACD and its 9-day EMA.
The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

A bullish crossover occurs when MACD moves above its 9-day EMA = think about going long, buy…
A bearish crossover occurs when MACD moves below its 9-day EMA = think about going short, sell…

On the previous chart, the last crossover, on 09/17, turns out to have been a great signal – the crossover on 09/11 wasn’t so shabby either…

Again, always remember
Shorter moving averages = quicker, more responsive indicator, but more whipsaws, fakeouts.
Longer moving averages = slower indicator, more stable

Sorry there’s been a few acronyms flying around here – can’t be helped… there won’t be so many when we get to 9. Bollinger bands →