The Moving Average Convergence Divergence (MACD) is one of the most popular technical indicators used by traders to identify changes in market momentum, trend direction, and potential buy or sell signals. Developed by Gerald Appel in the late 1970s, the MACD combines moving averages to show the relationship between short-term and long-term price trends, helping traders visualise when momentum is strengthening or weakening.
How it Works
At its core, the MACD is based on two exponential moving averages (EMAs):
- The 12-period EMA (short-term)
- The 26-period EMA (long-term)
The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA. This difference oscillates above and below zero, representing whether short-term momentum is stronger or weaker than the longer-term trend.
A signal line, typically a 9-period EMA of the MACD line, is then plotted on top. The interaction between the MACD line and the signal line helps traders spot potential changes in momentum.
Finally, the MACD histogram visually represents the distance between the MACD line and the signal line. When the histogram bars are above zero, momentum is bullish; when below, momentum is bearish. The height of the bars reflects the strength of that momentum.
Spotting Momentum Shifts
- Signal Line Crossovers
The most common way traders identify momentum shifts is by watching for crossovers between the MACD line and the signal line:- Bullish crossover: When the MACD line crosses above the signal line, it suggests momentum is shifting upward, indicating a potential buying opportunity.
- Bearish crossover: When the MACD line crosses below the signal line, it suggests momentum is turning downward, potentially signaling a sell or short opportunity.
- Zero Line Crossovers
When the MACD line crosses the zero level, it confirms a broader shift in trend direction.- Crossing above zero often marks the start of an uptrend.
- Crossing below zero often signals the beginning of a downtrend.
Traders use these confirmations to align short-term trades with the prevailing trend.
- Divergences
Divergences occur when price action and the MACD move in opposite directions.
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- Bullish divergence: Price makes a new low, but the MACD forms a higher low — a sign that selling momentum is fading, and a reversal may follow.
- Bearish divergence: Price makes a new high, but the MACD forms a lower high — an early warning of weakening buying strength.
Using MACD Effectively
While the MACD is a powerful tool, it works best when combined with other forms of analysis. Many traders pair it with support and resistance levels, trendlines, or volume indicators to confirm signals. The MACD can occasionally give false signals in sideways or choppy markets, so context is key.
Short-term traders may adjust the MACD settings (for example, using 8, 17, and 9) for faster signals, while long-term investors typically prefer the default 12, 26, 9 configuration for smoother trends.