What is the Moving Average Convergence Divergence (MACD) formula and how is it calculated?
The moving average convergence divergence (MACD) is a technical momentum indicator, calculated for use with a variety of exponential moving averages (EMAs) and used to assess the power of price movement in a market.
There are a number of calculations involved in the creation of the total (MACD) indicator, all involving the use of exponential moving averages.
An EMA is calculated as follows:
• Calculate the simple moving average (SMA) for the chosen number of time periods. (The EMA uses an SMA as the previous period's EMA to start its calculations.) To calculate a 12-period EMA, this would simply be the sum of the last 12 time periods, divided by 12.
• Calculate the weighting multiplier using this equation: 2 / (12 + 1) ) = 0.1538
• Calculate the 12 EMA itself as
Putting together the MACD requires
simply doing all of the following EMA calculations for any given market instrument (a stock, future, currency pair, or market index):
1. Calculate a 12-period EMA of price for the chosen time period.
2. Calculate a 26-period EMA of price for the chosen time period.
3. Subtract the 26-period EMA from the 12-period EMA.
4. Calculate a nine-period EMA of the result obtained from step 3.
This nine-period EMA line is overlaid on a histogram that is created by subtracting the nine-period EMA from the result in step 3, which is called the MACD line, but it is not always visibly plotted on the MACD representation on a chart.
The MACD also has a zero line to indicate positive and negative values. The MACD has a positive value whenever the 12-period EMA is above the 26-period EMA and a negative value when the 12-period EMA is below the 26-period EMA.Source: www.investopedia.com