What the MACD Indicator is and How it Works

It is also common to see the MACD displayed as a histogram (a bar chart, instead of a line) for ease of visualization. Charting software will usually give you the option of being able to change the color of positive and negative values for additional ease of use. Convergence relates to the two moving averages coming together.

In fact, the MACD-Histogram bottomed towards the end of June and formed a bullish slant divergence. The thick red lines show the distance between MACD and its signal line. It is sometimes hard to gauge distance on the chart so these lines highlight the difference between 26-June and 8-July. This slant divergence foreshadowed the bullish signal line crossover in mid-July and a sharp advance in the stock.

Using MACD to Trade

This chart also shows a nice bullish divergence in March-April. It takes four steps to get from the actual price to the MACD-Histogram. While not necessarily a bad thing, chartists should keep this in mind when analyzing the MACD-Histogram.

• When price continues rising to a new high level but the MACD does not follow suit – instead turning south.
• But varying these settings to find how the trend is moving in other contexts or over other time periods can certainly be of value as well.
• A potential buy signal is generated when the MACD (blue line) crosses above the MACD Signal Line (red line).
• Remember, divergence is an imperfect tool that may provide beneficial insight into some trades but not others.
• Notice that MACD is required to be negative to ensure this upturn occurs after a pullback.

The signal line can be added separately by clicking the advanced indicator options and adding a 9-day EMA. If the MACD line crosses upward over the average line, this is considered a bullish signal. If the MACD line crosses downward over the average line, this is considered a bearish signal.

MACD Formula

Even though it is possible to identify levels that are historically overbought or oversold, the MACD does not have any upper or lower limits to bind its movement. During sharp moves, the MACD can continue to over-extend beyond its historical extremes. In the example above, the golden shaded area shows the MACD line in negative territory as the 12-day EMA trades below the 26-day EMA. In mid-February, the MACD moved further into negative territory as the 12-day EMA diverged further from the 26-day EMA. The red area highlights a period of positive MACD values, when the 12-day EMA was above the 26-day EMA.

Bearish divergence, on the other hand, describes a situation where the MACD records a lower high, while the price hits a higher high. Bullish divergences usually take place during strong downtrends, while bearish divergences occur in strong uptrends. A MACD line with a positive value indicates that the shorter EMA is above the longer EMA. The further the shorter EMA is from the longer one, the bigger the increase in the positive value of the MACD line. On the other hand, a negative MACD indicates that the shorter EMA is below the longer one.

How to Trade with the MACD Indicator

Zeroes in the MACD histogram occur when the MACD line crosses higher than the signal line (generally considered a buy signal) or below the signal line (a sell signal). Peaks and troughs in the histogram indicate when a burst of bearish or bullish momentum is losing strength, and the curve is likely to return to its mean. The signal line is calculated by taking the difference https://www.bigshotrading.info/blog/buying-and-selling-volumes/ between the two EMAs, and from that number create a nine-day moving average. A crossover occurs when the signal and MACD line cross each other. The MACD generates a bullish signal when it moves above its own nine-day EMA and sends a sell signal (bearish) when it moves below its nine-day EMA. The moving average convergence divergence was invented by Gerald Appel.

If you would like to contact the Bullish Bears team then please email us at bbteam[@]bullishbears.com and we will get back to you within 24 hours. In fact, market Forecasting is a skill that must be developed by study and practice. As a result of knowing how to read MACD, you have the ability to trade the trend as well macd interpretation as know when to sit out. Hence why knowing how to read MACD is important to trading the indicator. Look at the picture above, you can see that when the 12EMA and the 26EMA cross, the Value Line crosses the zero line. This is because the Diff Line is measuring the distance between the Value Line and the Avg Line.

In an accelerating downtrend, the MACD line is expected to be both negative and below the signal line. When price is in an uptrend, the white line will be positively sloped. The 12-period EMA will respond faster to a move up in price than the 26-period EMA, leading to a positive difference between the two. Divergence could also refer to a discrepancy between price and the MACD line, which some traders might attribute significance to. IC Markets mission is to create the best trading experience for retail and institutional clients alike, allowing traders to focus more on their trading.

Signal line crossovers at positive or negative extremes should be viewed with caution. Even though the MACD does not have upper and lower limits, chartists can estimate historical extremes with a simple visual assessment. It takes a strong move in the underlying security to push momentum to an extreme. Even though the move may continue, momentum is likely to slow and this will usually produce a signal line crossover at the extremities. Volatility in the underlying security can also increase the number of crossovers. The other highly valuable signal generated by the MACD is the divergence.

Basic Mechanics and Interpretation of the MACD

Some traders wait for a confirmed cross above the signal line before entering a position to reduce the chances of being faked out and entering a position too early. The relative strength index (RSI) aims to signal whether a market is considered to be overbought or oversold in relation to recent price levels. The RSI is an oscillator that calculates average price gains and losses over a given period of time.

• Aspray developed the MACD-Histogram to anticipate signal line crossovers.
• It’s important to treat day trading stocks, options, futures, and swing trading like you would with getting a professional degree, a new trade, or starting any new career.
• Secondly, divergence doesn’t forecast all reversals, i.e., it predicts too many reversals that don’t occur and not enough real price reversals.
• The start of a trend is usually where most of the money is made after all.
• This example should demonstrate how observing the MACD histogram can help anticipate changes in trends in both short-term and long-term price momentum.