MACD

    By
    Andrey Orlov
    -
    0

    The MACD, or moving average convergence divergence, is a technical indicator used to spot a new trend by showing the relationship between three moving averages.

    It is used to help identify reversals of price action, as well as confirming which direction the price is moving — it can be used as both a trend following indicator and an oscillator.

     

    The MACD is made up of four primary components that are used in conjunction with each other to give signals.

    (1) MACD line
    (2) Signal line
    (3) Histogram
    (4) Zero line

    The components are derived from the relationship between three different moving averages:

    • 26 period exponential moving average
    • 9 period exponential moving average
    • 12 period exponential moving average

    26, 9 and 12 are therefore the standard settings when using the MACD indicator.

    Deriving the MACD line, signal line and the histogram

    MACD line:12 period EMA — 26 period EMA
    Signal line:The 9-day EMA of the MACD line
    Histogram:MACD — Signal line

    How to interpret the MACD

    MACD line and signal line cross each other

     

    The signal line moves more slowly than the MACD line and when these two lines crossover, it indicates that the momentum has changed:

    (1) When the MACD line crosses below the signal line, this indicates that the momentum has reversed to the downside.
    (2) When the MACD line crosses above the signal line, this indicates that the momentum is to the upside.

    MACD and signal line both cross the zero line:

     

    (1) When the signal line and the MACD line cross above the zero line, this indicates that the momentum of the price direction is increasing towards the upside.

    (2) When they cross below the zero line, this indicates that the momentum of the price action is increasing to the downside.

    The histogram in relation to the zero line

     

    The histogram measures the distance between the MACD line and the signal line and so this shows when the signal line and the MACD lines are converging or diverging, and hence provide signals that they are about to crossover:

    (1) When the histogram is below the zero line, that indicates that the MACD line is below the signal line and this indicates downward momentum in price action.
    (2) When the histogram crosses the zero line, the MACD line and the signal crossover indicating that the momentum in the price action is reversing.
    (3) When the histogram is above the zero line, then the MACD line is above the signal line and this indicates upward momentum in price action.

    More on the MACD and technical analysis

    Find out how to effectively trade with the MACD using divergence:

    Divergence

    Learn how to read charts using technical analysis:

    Chart analysis