MACD - Moving Average Convergence Divergence
Type: Trend & Momentum
MACD measures the relationship between two exponential moving averages to identify trend direction and momentum shifts. It gives both trend-following and momentum signals in a single indicator.
How it Works
MACD is calculated by subtracting the 26-period EMA from the 12-period EMA. This produces the MACD Line. A 9-period EMA of the MACD Line — called the Signal Line — is then plotted alongside it.
The difference between the MACD Line and Signal Line is displayed as a histogram — bars above zero indicate bullish momentum, bars below zero indicate bearish momentum.
How to Read It
There are three components to watch: the MACD Line, the Signal Line, and the Histogram.
When the MACD Line crosses above the Signal Line, it's considered a bullish signal. When it crosses below, bearish. When the histogram bars grow, momentum is increasing in that direction. When bars shrink, momentum is fading.
Key Signals
• Bullish crossover: MACD Line crosses above Signal Line — potential buy signal, especially below the zero line.
• Bearish crossover: MACD Line crosses below Signal Line — potential sell signal, especially above the zero line.
• Zero line cross: MACD crossing above zero confirms bullish trend shift; below zero confirms bearish.
• Histogram divergence: Histogram shrinking while price continues to move — momentum is weakening before price reverses.
Limitations
• MACD is a lagging indicator. By the time a crossover occurs, a significant portion of the move may already be over.
• In choppy or sideways markets, MACD produces frequent false crossovers.
• It is not useful for identifying overbought or oversold conditions — use RSI or Stochastic for that.
Trader's Tip: Use MACD in trending markets, not ranging ones. When price is moving sideways, MACD crossovers are noise. Wait for a clear directional move before acting on them.