Moving Average Convergence Divergence (MACD): How to Read It
MACD tracks the gap between a fast and slow EMA to reveal changes in trend momentum. A signal line and histogram make it easier to see when momentum is building or fading.
The formula
Common settings: 12, 26, 9
How to read it
- MACD above zero means the fast EMA is above the slow EMA, a bullish bias.
- MACD below zero suggests a bearish bias.
- A growing histogram shows momentum strengthening.
- A shrinking histogram shows momentum fading.
- Divergence between MACD and price can warn of a potential turn.
Typical signals
- MACD line crossing above the signal line as a bullish signal.
- MACD line crossing below the signal line as a bearish signal.
- MACD crossing above or below zero as a trend confirmation.
- Histogram turning up from a low as early momentum improvement.
Pitfalls to avoid
- Based on moving averages, so it lags price.
- Produces whipsaw crossovers in sideways markets.
- Values are in price units, so they cannot be compared across assets easily.
Strategies that use it
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What do the numbers 12, 26, 9 mean?
They are the fast EMA, slow EMA and signal line periods.
What does the histogram show?
It shows the distance between the MACD and signal lines, highlighting momentum changes.
Is MACD a trend or momentum indicator?
It blends both: it is built from trend-following averages but used to measure momentum.
Works well with
Exponential Moving Average
The Exponential Moving Average is a moving average that gives more weight to recent prices. It responds faster than the SMA, which helps traders spot trend changes sooner.
🌡️Relative Strength Index
The Relative Strength Index measures the speed and size of recent gains versus losses on a scale from 0 to 100. It helps spot when a market may be stretched too far in one direction.
💪Average Directional Index
The Average Directional Index measures how strong a trend is, regardless of its direction. Paired with the +DI and -DI lines, it also helps identify which side is in control.