MACD (Moving Average Convergence Divergence) is a popular trend and momentum indicator. It helps traders identify trend changes and momentum shifts. Here is how it works.
What is MACD?
MACD measures the relationship between two moving averages of price. It consists of three components:
- MACD Line: The 12-period EMA minus the 26-period EMA
- Signal Line: A 9-period EMA of the MACD line
- Histogram: The difference between MACD line and signal line
Simple concept: MACD shows how fast the short-term trend is moving compared to the longer-term trend. When they diverge, momentum is building. When they converge, momentum is fading.
How to Read MACD
MACD Line Above/Below Zero
- MACD above zero = bullish momentum (12 EMA above 26 EMA)
- MACD below zero = bearish momentum (12 EMA below 26 EMA)
Signal Line Crossovers
- MACD crosses above signal line = bullish signal
- MACD crosses below signal line = bearish signal
Bullish Crossover Example
Stock has been falling. MACD line is below the signal line.
Price starts to recover. MACD line crosses above signal line.
This bullish crossover suggests momentum is shifting upward.
Histogram
The histogram shows the difference between MACD and signal line:
- Growing histogram = momentum increasing
- Shrinking histogram = momentum decreasing
- Histogram above zero = bullish momentum
- Histogram below zero = bearish momentum
MACD Divergence
Divergence between price and MACD can signal potential reversals:
- Bullish divergence: Price makes lower low, MACD makes higher low
- Bearish divergence: Price makes higher high, MACD makes lower high
MACD Trading Strategies
Signal Line Crossover Strategy
- Buy when MACD crosses above signal line
- Sell when MACD crosses below signal line
- Works best in trending markets
Zero Line Crossover Strategy
- Buy when MACD crosses above zero
- Sell when MACD crosses below zero
- More conservative, fewer signals
Histogram Reversal Strategy
- Watch for histogram to shrink after being extended
- Enter when histogram starts reversing direction
- Can catch reversals earlier than crossovers
MACD Settings
- Standard (12, 26, 9): Most common, works for most timeframes
- Fast (5, 13, 1): More signals, good for day trading
- Slow (19, 39, 9): Fewer signals, good for position trading
Limitations of MACD
- Lagging indicator - signals come after the move starts
- Many false signals in choppy/sideways markets
- Crossovers can be late, missing part of the move
- Works best combined with other indicators
Track Your MACD Trades
Pro Trader Dashboard helps you analyze which MACD signals work best for your trading.
Summary
MACD shows the relationship between two moving averages to identify trend changes and momentum. Use signal line crossovers for trade signals, zero line crossovers for trend confirmation, and divergence for potential reversals. Remember that MACD is a lagging indicator and works best in trending markets.
Learn more: moving averages and RSI indicator.