The Complete Guide to MACD Indicator

Investors use indicators for trading alerts, to confirm other indicators, forecast prices, and guide entry and exit decisions. Moreover, price divergence, which MACD attempts to identify, may not always accurately predict a trend reversal, as price may continue in the ongoing direction. Consequently, traders must seek additional indicators or confirmations to validate potential moves. The MACD histogram shows the difference between the MACD line and the signal line, representing it as bars. When the bars are above the zero line, the MACD line is above the signal line. Conversely, when the bars are below the zero line, the MACD line is below the signal line.

Being separated from the price chart keeps the price chart clean and still provides great insight into the momentum of the market. Although many people often find them similar, the MACD and Stochastic indicators are entirely different. The Stochastic indicator is based on the speed of price differences. The moving average is simply creating an average of all the previous prices.

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While 12, 26, and 9 are the typical value settings used with the MACD, traders can opt for other values depending on their trading style and goals. When a new trend occurs, the faster line (MACD Line) will react first and eventually cross the slower line (Signal Line). This is called a MACD divergence because the faster moving average (MACD Line) is “diverging” or moving away from the slower moving average (Signal Line). When looking at the indicator, the Signal Line is considered the “slower” moving average. Do you sometimes feel lost in your trading and miss the best trading opportunities?

The indicator can be applied to any timeframe, but it’s preferable to choose those from H1 and bigger. Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request. Not investment advice, or a recommendation of any security, strategy, or account type. In other words, the Signal Line is just a smoothed out, less choppy version of the MACD line. The time period for the EMA of the MACD Line otherwise known as the Signal Line. To fully understand the MACD indicator, it is first necessary to break down each of the indicator’s components.

How is MACD Calculated?

By the time investors see a buy or sell signal, they may have already missed some gains. The moving average convergence divergence (MACD) index was invented by Gerald Appel in the 1970s. Appel designed the MACD as a technical analysis tool to gain insight on stock prices, with the intent to reveal data about the stock’s momentum, strength, as well as directional assumptions. The MACD line, denoted by a blue line, is derived by subtracting the longer exponential moving average (EMA) from the shorter exponential moving average. EMA periods refer to the number of price points included in a specific measurement and depending on the indicator, you’ll use different EMA periods to find different trends.

• An EMA is a type of moving average (MA) that places a greater weight and significance on the most recent data points.
• As a result, it can assist in determining trend reversals and defining potential entry and exit points for your deals.
• Traders use this technical indicator to potentially identify trends, whether they are bullish or bearish.
• But if you chose a leading strategy, like the histogram, you might be able to spend less time monitoring your MACD, as the signals should present themselves ahead of time.
• A MACD histogram usually accompanies the MACD, which shows the difference between the MACD line and the signal line.
• Either indicator may signal an upcoming trend change by showing divergence from price (price continues higher while the indicator turns lower, or vice versa).

A MACD histogram usually accompanies the MACD, which shows the difference between the MACD line and the signal line. If the MACD is above its signal line, the histogram will be above the MACD’s baseline; if the MACD is below its signal line, the histogram will be below the MACD’s baseline. Traders should deploy money management principles to cut losses quickly and protect the paper gains when the trade moves as per the assumption. In another example, Binance Coin (BNB) crossed over the centerline on July 7, 2020, triggering a buy signal.

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Conversely, a bearish divergence occurs when the MACD forms two falling highs that line up with two rising highs in the price. Like most other technical analysis tools, the MACD indicator also comes with its own distinct advantages and disadvantages. To fully harness this momentum and trend indicator to its maximum capability, it’s essential to understand where it triumphs and where it can fall short. So, while the signal crossovers can be helpful, they are not always reliable. Therefore, it is also worth considering where they occur in the chart to minimize the risks. For instance, some traders wait for a confirmed cross above the signal line to avoid entering a position too early.

TD Ameritrade does not make recommendations or determine the suitability of any security, strategy or course of action, for you through your use of trading tools or technical trading indicators. Any investment decision you make in your self-directed account is solely your responsibility. You may notice the MACD histogram bars move above and How to Use the MACD Indicator below a zero line. Movement around this zero line can help indicate the strength of a stock trend as well as potential trade entry points. Adopting a new trend too soon, or too late, can result in some awkward moments. And being caught on the wrong side of a stock trend can be more than awkward—it can be potentially disastrous to a trade.

useful tips for using the MACD indicator in technical analysis

It is important to note that, unless a trader utilises guaranteed stop-loss, which comes at a fee, it may not protect them from slippage in the events of extreme market volatility. For example, if you’re interested in defining a MACD cross, this can be scripted as shown in the image below. Do note, these conditions do not define whether the cross is up or down, only that the MACD and Signal lines are crossing. If you’d like to specify a cross-up or down, you can do so using the ‘Crossed Up’ and ‘Crossed Down’ definers. When RSI and MACD agree, the signal they offer may be more reliable and give you more confidence. But they aren’t foolproof, and overconfidence in these indicators can lead to costly losses.

• This means that as the bars on the histogram move further away from zero, the two moving average lines are moving further apart.
• The first type of Signal Line Crossover to examine is the Bullish Signal Line Crossover.
• An approximated MACD can be calculated by subtracting the value of a 26 period Exponential Moving Average (EMA) from a 12 period EMA.
• Traders can make use of these signals to enter or exit positions based on their preferred trading strategy.

Others may feel that one signal’s change of momentum may be a harbinger of the other signal’s change of direction and a corresponding shift in price movement. This relationship is presented on a histogram that offers an easy visual representation of both the strength of a forex price trend as well as signals that may indicate a change in momentum. On the CHF/JPY chart below, the gaps between the 26-day EMA (the blue line) and the signal line (the red line) correlate to the momentum of the price movement. The larger the gap between these lines, the stronger the trend in either direction. Like all technical indicators, the settings of the MACD can be changed to different time periods but traders tend to prefer the defaults.