Looking for some additional tools to help you trade? MACD may be able to give you some clues about good times to buy or sell.
Fidelity believes that company fundamentals like earnings drive stock prices over the long-term; however, using tools like MACD may be able to give you some additional perspectives.
There are many technical indicators, and each one provides a different view of what’s going on. MACD—which stands for Moving Average Convergence Divergence—is one of the most popular indicators because it provides a wealth of information in a single chart.
What does MACD do?
Like the relative strength index, MACD oscillates, or ranges up and down. The two lines that form this indicator move back and forth around the zero line.
It’s important to understand what these two lines represent. The MACD is a momentum indicator that uses the relationship between two moving averages of prices to identify potential trends. In broad terms, the MACD is calculated by subtracting a longer moving average (usually based on 26 days) from a shorter moving average (usually 12 days of data). This is typically shown as a solid line.
Then, a moving average based on an even shorter period (usually nine days), called the "signal line," is plotted and is meant to help identify buy and sell signals. The signal line usually shows up as a dotted line. When the two lines cross over each other, and where they are in relation to the zero line—above it or below it—at the time of the crossover, could indicate a shift in the trend.
How can I use MACD?
The most basic way of viewing this indicator is by looking at MACD by itself. When MACD moves up and over the zero line, it may be a bullish sign indicating that the stock will go up after declining. When it crosses down over the zero line, it could be a bearish indication, potentially pointing to a drop after the stock has been going up.
Crossovers with the signal line are very significant as well. If MACD crosses above the signal line from below while they are both below the zero line, it could signal that the trend will turn to the upside. The signal is strengthened by the depth below the zero line—further down means a stronger signal that the trend will turn. Similarly, when MACD and the signal line are strongly above the zero line, if MACD crosses down over the signal line from above, it can indicate that a bearish trend may take over.
MACD is a pretty versatile indicator; it can be used by beginners and it can be used in more complex ways by advanced traders. While chart analysis can help give you an idea of when to buy or sell, don’t rely on any one indicator. Instead, use a mix of indicators to try to confirm your ideas.
Where to find it
You can add MACD to your charts on Active Trader Pro®, Fidelity’s brokerage trading platform. Open a chart, select Indicators from the main menu, and find MACD. You can add it to a chart on Fidelity.com as well. From the stock snapshot page, navigate to the chart and select Indicators, then select MACD.
Past performance is no guarantee of future results.
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