MACD: Moving Average Convergence Divergence

MACD is a versatile trend-following momentum indicator that shows the relationship between two moving averages. It's one of the most widely used technical tools. [DEFINITION] MACD (Moving Average Convergence Divergence): A trend-following momentum indicator calculated by subtracting the 26-period EMA from the 12-period EMA, displayed with a signal line (9-period EMA of MACD). ### MACD Components **MACD Line:** 12-period EMA - 26-period EMA **Signal Line:** 9-period EMA of MACD Line **Histogram:** MACD Line - Signal Line (shows momentum) [TIP] You don't need to calculate MACD manually—every charting platform displays it. Focus on understanding what it tells you. ### MACD Signals **1. Signal Line Crossovers:** - MACD crosses above signal = bullish - MACD crosses below signal = bearish **2. Zero Line Crossovers:** - MACD crosses above zero = medium-term trend turning bullish - MACD crosses below zero = medium-term trend turning bearish **3. Divergence:** - Same concept as RSI divergence - Price vs. MACD direction disagree = potential reversal [EXAMPLE] Stock price makes new high at $100, MACD makes lower high. Bearish divergence—momentum weakening despite higher prices. ### Histogram Interpretation The histogram shows momentum strength: **Growing histogram (bars getting larger):** - Momentum increasing - Trend strengthening **Shrinking histogram (bars getting smaller):** - Momentum decreasing - Potential trend change coming [KEY] The histogram often turns before the MACD line crosses the signal line, providing an early warning of momentum shift. ### Common MACD Strategies **Strategy 1: Signal Line Cross** - Buy when MACD crosses above signal line - Sell when MACD crosses below signal line - Works well in trending markets **Strategy 2: Zero Line Cross** - More conservative; fewer signals - Buy when MACD crosses above zero - Sell when MACD crosses below zero **Strategy 3: Divergence Trading** - Watch for price/MACD divergence - Trade the reversal with confirmation [WARNING] MACD gives many false signals in choppy, sideways markets. It works best when markets are trending. Combine with trend identification first. ### MACD Settings **Standard settings:** 12, 26, 9 **Faster settings:** 8, 17, 9 (more signals, more false ones) **Slower settings:** 19, 39, 9 (fewer signals, more reliable) [EXERCISE] MACD just crossed above the signal line while both are below zero. What does this suggest, and is it a strong buy signal? |ANSWER| This is a bullish signal (MACD crossed above signal), but it's occurring in negative territory, meaning the medium-term trend is still bearish. It suggests improving momentum but the trend hasn't fully turned. Consider it a cautious buy or wait for zero line crossover for stronger confirmation. [SCENARIO] You see a stock with MACD at +5, signal line at +4, and histogram bars shrinking for 5 days (was +3, now +1). Price is still rising slowly. What's happening? Although MACD is positive (bullish territory) and still above signal (bullish), the shrinking histogram warns that bullish momentum is fading. The rally may be running out of steam. This is an early warning to tighten stops or take partial profits, even though no official sell signal has occurred yet.