What is the MACD?
MACD is the acronym of Moving Average Convergence / Divergence and it is a technical analysis tool originally created by Gerald Appel in 1979. MACD is one of the simplest trend-indicators and it can be applied everywhere. It is a powerful tool to indicate the reversal of a trend in short-periods but it is not a good tool to estimate the overall overbought and oversold market levels.
According to the most popular setting, MACD is measuring the difference between a 26-day EMA and a 12-day EMA (Exponential Moving Averages). Additionally, a 9-day EMA may be used as a trigger line. When MACD moves above its 9-day EMA the market is considered bullish while if MACD moves below its 9-day EMA, the market is considered bearish.
◘ MACD Line = 12-day EMA - 26-day EMA
◘ MACD Signal Line = 9-day EMA of MACD Line
◘ MACD Histogram = MACD Line - MACD Signal Line
Other settings may also be used to make MACD more sensitive. Some analysts are using the setting (5,35,5) and that means a fast-moving average of 5-days, a slow-moving average of 35-days, and a trigger line of 5-days.
The MACD Histogram
The histogram provides an easy framework to identify the trend. When the histogram is found on positive territories then the trend is bull, while when it is found on negative territories, the trend is bear.
Trading using the MACD
MACD consists of two different speed moving averages. That means that one moving average is fast (12-day) and reacts before the slow one (26-day). When the fast moving average crosses the slow moving average usually a new trend is born. Here are the most common MACD signal types.
1) Signal Line Crossovers
A buy-signal occurs when the MACD crosses above the signal line (9-day moving average). A sell-signal occurs when the MACD crosses below the signal line.
2) Centerline Crossovers
A buy-signal occurs when the MACD crosses above the zero lines to turn positive. A sell-signal when the MACD crosses below the zero lines to turn negative.
Divergences are said to be formed when the MACD starts to diverge from the actual price action. A buy-signal occurs when the MACD forms a higher low while the underlying security forms a lower low.
Using MACD (12, 26, 9) as a Confirmation Tool
You can confirm your trade entries with MACD. If you select MACD on its default settings (12, 26, 9) focus on three timeframes (H1, H4, and D1), where MACD is significantly more reliable.
- When the MACD crosses above the signal line, a bullish signal is confirmed
- When the MACD falls below the signal line, a bearish signal is confirmed
- Search for potential divergences between the slope of the MACD and the slope of the price chart. These divergences can work as an early indication of a price exhaustion
◘ What is MACD?