Calculating a Moving Average

• MACD is a moving average calculation. A moving average is useful when calculating stock prices as it fixes a number of price records to perform each calculation, simplifying comparisons. For example, a moving average includes the closing price of a stock on each of the last fifty days. Tomorrow's moving average calculation includes tomorrow's closing price, and removes the closing price record taken fifty days ago.
  
  

Variability

• Moving averages include an amount of price records that the user selects. The addition of more price records makes the moving average behave less erratically. An average with three prices can vary widely if an event that effects the stock price happens one day, and there is much less variance if the moving average calculation includes a hundred stock prices.
  
  

Multiple Moving Averages

• Stock analysts and other traders sometimes select more than one moving average to perform a comparison. For example, they can calculate a hundred day moving average and a two hundred day moving average. Because these include different amounts of price records, the moving average values will likely be different.
  
  

Charting Moving Averages

• Analysts chart the separate moving averages as individual lines. Displaying the moving average lines in different colors makes them easier to see. Sometimes the moving average lines will cross one another. If a moving average from a shorter period, such as a hundred days, crosses above a line from a longer period, such as two hundred days, this means that prices were increasing during the last hundred days and provides a signal for some traders to buy the stock.
  
  

Exponential Moving Average

• MACD uses an exponential moving average, or EMA. An exponential moving average is a type of moving average that adds additional weight to the current price record. According to Princeton University, adding this emphasis clarifies whether a price change is a single event or the longer term pricing trend is changing.
  
  

The MACD Indicator

• MACD is a measure of divergence and convergence between two exponential moving average lines. This indicator shows the percentage difference between the different exponential moving averages. MACD displays include a MACD line on a chart with a horizontal line at the zero percent point. If the MACD line crosses above zero percent, the exponential moving average from the shorter time period is above the exponential moving average from the longer time period, which is a buy signal. If the MACD line is below zero percent, the reverse is true, which is a sell signal.