The MACD are useful for measuring market momentum as well as possible price trends and is employed by many traders and investors to identify potential entry and exit points in market.
Here’s the MACD formula:
MACD Line: 12-day EMA minus 26-day EMA
Signal Line: 9-day EMA of MACD Line
MACD Histogram: MACD Line – Signal Line
“12, 26, 9” as the MACD parameters is usually the default setting for most charting software.
Here the The 12 represents the previous 12 bars of the faster moving average. The 26 represents the previous 26 bars of the slower moving average.
The 9 represents the previous 9 bars of the difference between the two moving averages(12,26). This is plotted by vertical lines called a Histogram.
There is a general misinterpretation when it comes to the lines of the MACD. The two lines that are drawn are not moving averages of the price of the stock or index you are trading. Instead, they are the moving averages of the difference between two moving averages.
The Histogram simply plots the difference between the 12 and 26 day moving average.