MACD is not a reference to a popular fast-food chain. It’s an abbreviation for Moving Average Convergence Divergence. This is a widely used indicator that basically turns two trend-following indicators into an oscillator that shows momentum.
What MACD does, is removing the longer moving average from the shorter moving average. What remains is something that, when spread out over time, tells you something about the momentum of an asset.
It won’t be a surprise to learn that MACD is a trend following and lagging indicator. It’s following the price of an asset based on events that have already happened (it’s based on the moving average, remember?).
In the image below, you can see the MACD at the bottom. In this MACD graph you see three things: The MACD line (white), the signal line (yellow) and the histogram. The MACD line is made up using a 12-period Moving Average minus a 26-period Moving Average, while the signal line is a 9-period EMA of the MACD. The histogram shows the difference between these two lines.
When the MACD line crosses above the signal line, we’re talking about the bullish moment. When it goes below, the moment become bearish. The crossing is a shift in trend momentum. These crossing moments are buy or sell signals, depending on the type.
The bigger the difference between the two lines, the more overbought or oversold an asset is. Therefore it’s very likely that, when there’s a major gap between the two, momentum will shift.