Moving average convergence divergence (MACD) is a lagging trend indicator. MACD has three components: the MACD line, MACD signal, and MACD histogram. The MACD line helps in identifying trend changes as it signals the start of a new trend direction. Large positive values of the MACD line indicate that the shorter EMA is much larger than the longer EMA. This suggests that there is an overbought condition in the market, which means prices will be going up. Similarly, large negative values of the MACD line indicate that the shorter EMA is much smaller than the longer EMA. This suggests that there is an oversold condition in the market, which means the prices will be going down. When the MACD line crosses above the MACD signal and is positive, a buy signal is generated; and the MACD line crosses below the MACD signal and becomes negative, a sell signal is generated.
The formulae for computing the three components of MACD are given...