What Is the Role of MACD in Technical Analysis?

Investors use technical analysis to determine at what point they should purchase stock based on price movements. MACD in technical analysis stands for moving average convergence-divergence, which is a common and useful momentum indicator. Investors use both a stock's 12-day and 26-day moving average trends to determine when it is going cross the trend line and swing up or down in price. Swing traders are typically the most interested with MACD in technical analysis. These investors use short-term price movements to make money on trades.

A stock’s 12-day moving average is often faster when compared to the 26-day moving average. Due to this quick movement, the 12-day moving average trend line is most responsible for the buy and sell points with MACD in technical analysis. The 26-day moving average tends to be slower and less reactive to price changes associated with a stock. This allows investors to create clear trend lines on a technical analysis chart and discover the crossover points. In most cases, the buy and sell points are not too far away, making the use of both 12-day and 26-day trends somewhat risky for long-term stock purchases.

MACD in technical analysis starts by subtracting the 12-day moving average from the 26-day moving average. The result is a nine-day line that can represent the signal line on a stock’s technical price chart. On the histogram chart, the signals are positive when the nine-day moving average is above the MACD line. The opposite is true as well, with the chart being negative when the nine-day moving average signals are below the MACD line. Signals moving from positive to negative or negative to positive indicates a buy or sell point, depending on the investor’s current position in the stock.

Centerline crossovers are among the most common moves seen with MACD in technical analysis. For example, an investor can draw a stock’s 12-day moving average on the corresponding technical analysis chart. Then, investors can draw a second line that represents the 26-day moving average. When the 26-day moving average line crosses over the 12-day moving average line, a buy or sell point occurs. When the 26-day line crosses over the 12-day line, investors should go short on the stock; when it crosses under, investors can go long.

Like any investing techniques, risk is possible with MACD in technical analysis. Investors should be wary of any charts they cannot clearly understand. Also, investors should only start with small positions and then work toward larger ones in order to mitigate wild price swings that can quickly wipe out gains. Talking with professional investors can help remove some doubt with stock investments.