MACD

Short for moving average convergence divergence. The construction has three parts. The MACD line is one exponential moving average of closing prices subtracted from a shorter one, conventionally the twelve period average less the twenty six period average. The signal line is a nine period exponential average of the MACD line itself. The histogram is the MACD line less the signal line, drawn as bars around zero. Those three windows are a convention inherited from the indicator's original description, not a property of any market, and other windows are in common use.

What the reading states is narrow. Because the MACD line is a difference between two averages, it is positive when the shorter average sits above the longer one and negative when it sits below, so it says the same thing a moving average crossing says, expressed as a distance rather than as an event. The histogram then measures how fast that distance is changing. Chart readers describe the histogram turning while price continues in the other direction as divergence, and treat it as a convention worth noticing rather than as a signal with a settled record: published tests of divergence reach different conclusions depending on the market, the windows and the period tested.

Two things trip readers up. The indicator is built from averages of prices that have already printed, so it is a lagging indicator by construction, and no choice of window removes the lag. And it has no fixed scale: the MACD line is quoted in the price units of the instrument, so a reading of two on one instrument and a reading of two on another describe nothing comparable, which is what separates it from an oscillator bounded between fixed limits.