MACD - How it Works

Good article at Money Show on how one of the most popular technical indicators - MACD work.

What is the MACD? It is essentially a complex, triple moving average system. First, the MACD is calculated by taking the difference or spread between a 26- and 12-period exponential moving average; then, the signal line, which is a nine-period exponential moving average of this difference, is calculated. In past issues we have discussed using weighted moving averages. Exponential moving averages are just one type of weighted average where the most recent data is given more weight using an exponential formula.

The most basic interpretation is that when the MACD is above the signal line, it is giving a positive signal; conversely, when it is below the signal line, it is negative. Traditionally, these were plotted as two lines, but I found that by plotting the difference as a histogram, which I called the MACD-His, positive and negative divergences were revealed. In summary, whenever the MACD crosses the signal line, the MACD-His crosses the zero line. Sharp increases in the MACD-His reflect a dramatic rise in upward momentum while sharp declines reflect that selling pressure has increased.

Read more at the link.