The Moving Average Convergence Divergence (MACD) is a powerful supplementary tool for analyzing price trends in chart analysis. This guide explains the MACD’s calculation, general analysis methods, and how to interpret divergence signals effectively.
How the MACD is Calculated
- MACD Line = Short-term EMA (12 days) – Medium-term EMA (26 days)
- Signal Line = 9-day EMA of the MACD Line
- Histogram = MACD Line – Signal Line
Default Settings:
- Short-term EMA: 12 days
- Medium-term EMA: 26 days
- Signal Line: 9 days
General Methods of MACD Analysis
- Buying Signals:
- Gold Cross of MACD Line: When the MACD line crosses above the signal line.
- Histogram Reversal: When a declining histogram starts to increase.
- Zero Line Breakout (MACD): When the MACD line crosses above the zero line.
- Selling Signals:
- Dead Cross of MACD Line: When the MACD line crosses below the signal line.
- Histogram Reversal: When an increasing histogram starts to decrease.
- Zero Line Breakout (MACD): When the MACD line crosses below the zero line.
Understanding Divergence in MACD
What is Divergence?
Divergence occurs when the price movement differs from the MACD indicator’s signals. While some traders disregard divergence, it can reduce false signals when used correctly.
Key Divergence Types:
- Bullish Divergence: Price makes lower lows, but MACD shows higher lows, signaling potential trend reversal upward.
- Bearish Divergence: Price makes higher highs, but MACD shows lower highs, signaling potential trend reversal downward.
Interpreting MACD Signals
1. MACD Line and Zero Line Crossings
The MACD line crossing the zero line indicates significant shifts:
- Above Zero: Signals an uptrend, representing a gold cross between the 12-day and 26-day EMAs.
- Below Zero: Signals a downtrend, representing a dead cross between the 12-day and 26-day EMAs.
2. Signal Line Crossings
The MACD signal line (9-day EMA of the MACD) provides earlier signals than the MACD zero line crossover:
- Gold Cross: MACD line crosses above the signal line, signaling a potential uptrend.
- Dead Cross: MACD line crosses below the signal line, signaling a potential downtrend.
MACD Histogram Analysis
The histogram represents the distance between the MACD line and the signal line. Its changes help predict trend reversals:
- Rising Histogram:
- Indicates the MACD line is diverging further from the signal line.
- Suggests the current trend is strengthening.
- Falling Histogram:
- Indicates the MACD line is converging with the signal line.
- Warns of a potential trend reversal.
- Zero Line Crossover (Histogram):
- When a rising histogram crosses the zero line: Indicates the start of an uptrend.
- When a falling histogram crosses the zero line: Indicates the start of a downtrend.
Summary of MACD Trend Signals
Histogram BehaviorImplication
| Rising Histogram | Strengthening trend (MACD diverging from signal line). |
| Falling Histogram | Weakening trend (MACD converging with signal line). |
| Zero Line Crossover (Histogram) | Indicates a shift in trend direction. |
| MACD Line Crosses Signal Line | Early signal of trend reversal (gold/dead cross). |
| MACD Line Crosses Zero Line | Confirms trend direction (uptrend or downtrend based on crossover direction). |
Key Takeaways
While the MACD provides numerous buy and sell signals, simply reacting to every signal is not an effective strategy. Instead:
- Understand Signal Context: Analyze the meaning of each signal in the market’s broader context.
- Combine with Other Indicators: Use MACD alongside other tools like RSI or Bollinger Bands for more reliable insights.
- Create Strategies: Use MACD signals to develop rules for entry, exit, and risk management.
By mastering the MACD, traders can better anticipate market trends and make more informed decisions.
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