MACD
Also written Moving Average Convergence Divergence
Moving Average Convergence Divergence — the gap between the 12- and 26-period EMAs, read against its own 9-period EMA, to track shifts in momentum rather than price.
In plain language
A short moving average reacts quickly to price; a long one reacts slowly. When a stock accelerates, the short average pulls away from the long one. When the move tires, the two drift back together.
MACD turns that gap into a line you can chart. It converges and diverges — hence the name — and the pattern of that line tells a trader whether momentum is building, fading, or turning before the price chart makes it obvious.
How it works
Section 15.9.2 sets it up in two lines:
- The default MACD line (the "fast" MACD) is the difference between the 26-period EMA and the 12-period EMA.
- The slow MACD line is the 9-period EMA of that default line.
The workbook's reading rules:
| Signal | Reading |
|---|---|
| Both lines rising and fast crosses above slow | Buy |
| Fast already above slow, dips to almost touch it and turns up again | Buy — a fresh up move |
| Fast above slow, both rising | Established uptrend likely to continue |
| Price makes a higher high, MACD a lower high | Losing upward momentum |
| Price makes a new low, MACD a higher low | Losing downward momentum; likely to bottom out |
| Fast MACD bulges far above slow | Buying climax — sideways market or mild correction may follow |
| MACD makes a double top or bottom | Trend reversal could be likely |
| Weekly or monthly MACD clearly trending down | Avoid the stock |
The zero baseline distinguishes confirmed bull from confirmed bear markets — but the workbook says a crossover of the zero line should not be used for trading. A steep MACD shows a powerful move; a shallow one shows lack of power. And because MACD measures momentum, not price, it can flatten or reverse in a strong trend without the trend ending — so it must be used with other indicators and price action.
The formula
MACD line (fast) = 12-period EMA − 26-period EMA
Signal line (slow) = 9-period EMA of the MACD line
The workbook words the first line as "the difference between 26 EMA and the 12 EMA". The order of the words does not change what is being measured: the gap between the short and long averages.
A worked example
Illustrative readings on a weekly chart of a stock trading near Rs 1,000:
| Week | Price | MACD (fast) | Signal (slow) |
|---|---|---|---|
| 1 | Rs 985 | −6 | −4 |
| 4 | Rs 1,002 | −1 | −3 |
| 7 | Rs 1,040 | +5 | +1 |
In week 7 the 12-period EMA stands at Rs 1,021 and the 26-period EMA at Rs 1,016, so the fast MACD is 1,021 − 1,016 = +5.
By week 4 the fast line had already crossed above the slow line with both rising — the workbook's buy set-up. Note that the later move of MACD through zero is not a separate signal.
Divergence, months later. The price makes a new high of Rs 1,150 against an earlier high of Rs 1,100, but MACD peaks at +18 against its earlier +25. Price is still rising; momentum is not. The workbook reads this as the stock losing upward momentum — a warning, not yet a sell.
Why NISM asks about it
Chapter 15 (Technical Analysis) covers MACD in section 15.9.2, and both the sample questions and the Nifty case study test it: the default line (26 and 12 EMA, not 9), the 9-EMA slow line, divergences, and whether a zero-line crossover is a trade signal.
Common exam traps
- The default line uses the 26- and 12-period EMAs. The 9-period EMA builds the slow (signal) line. An option pairing 26 with 9 or 12 with 9 for the default line is wrong.
- A zero-line crossover is not a trading signal in the workbook's rules — the zero line separates confirmed bull and bear markets.
- MACD measures momentum, not price. A flattening MACD in a strong trend can simply mean the stock is losing speed; the trend may resume after consolidation.
- It is not bounded between 0 and 100. That is RSI. MACD is a difference of prices, so it can be any positive or negative number.
- Built from moving averages (lagging), it can still lead at times through divergence. The workbook says "at times", not that MACD is a leading indicator in general.
Check yourself
1.The default MACD line will most likely be the difference between:
- a)The 12-period EMA and the 9-period EMA
- b)The 26-period EMA and the 9-period EMA
- c)The 26-period EMA and the 12-period EMA
- d)The 26-period EMA and the 21-period EMA
Show the answer
Answer: (c) The 26-period EMA and the 12-period EMA
Three numbers define the MACD, and they must be kept in their places: the default MACD line is the difference between the 26 EMA and the 12 EMA, and the slow line is the 9 EMA of that default line.
So 9 is not a price EMA at all — it is applied to the MACD line itself. Options A and B both mistake the signal-line period for one of the two price averages, which is the trap this question is built on. Option D substitutes 21, which belongs to the workbook’s separate 13 / 21 / 34 EMA Fibonacci combination for trend-following, not to the MACD.
The name follows from the construction: the short average constantly converges towards and diverges away from the long average.
2.Which statement about moving averages is consistent with the workbook?
- a)Moving averages are leading indicators that anticipate turns before price
- b)Moving averages are lagging indicators but are very useful in identifying major trends
- c)A moving average is calculated from the highest price of each period
- d)Moving averages should only ever be used on intraday charts
Show the answer
Answer: (b) Moving averages are lagging indicators but are very useful in identifying major trends
The workbook states it plainly: MAs are lagging indicators but are very useful in identifying major trends.
Option A inverts this. The chapter’s leading candidates are elsewhere — the MACD "at times serves as a leading indicator", and the RSI "can be a lead indicator".
Option C is wrong on the input: a moving average is "the average of daily or weekly or monthly closing prices". Option D contradicts the chapter, which uses the 50 and 100 DMA for primary trends and recommends that monthly, weekly and daily MAs all point the same way before you trust a trend.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Dow TheoryCharles Dow's six-tenet framework: the market discounts everything, moves in primary, secondary and tertiary trends, must be confirmed by indices and volume, and trends persist until clearly reversed.
- Moving averageThe average price of a share over a rolling window, recalculated each session — it smooths away daily noise so that the underlying trend, and changes in it, become visible.
- RSIA momentum oscillator scaled 0 to 100 that measures the speed and size of recent price changes — conventionally read as overbought above 70 and oversold below 30.
- Support and resistancePrice levels where a move tends to pause or reverse — support where demand concentrates and forms a floor, resistance where supply concentrates and forms a ceiling.
- Technical analysisForecasting price direction from past price and volume alone, on the assumption that everything worth knowing about a company is already in its price.
- ADXAn oscillator running from zero to 100 that measures how strong a trend is, without indicating whether that trend is up or down.