Moving Average Convergence Divergence (MACD)
The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security's price. It is designed to reveal changes in the momentum of a stock or other asset. It consists of three components: the MACD line, the signal line, and the histogram.
MACD Indicator Explained
The MACD indicator is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. A nine-day EMA of the MACD line is then plotted on top of the MACD line, acting as a signal line for triggers to buy and sell.
- MACD Line: The difference between a shorter-term EMA and a longer-term EMA.
- Signal Line: An EMA of the MACD line, typically 9 periods.
- Histogram: The difference between the MACD line and the signal line, plotted as vertical bars.
The MACD oscillates around a zero line. When the MACD is above zero, it indicates bullish momentum. When it's below zero, it suggests bearish momentum.
Trading with MACD: Signals
MACD provides signals based on the crossover of the MACD line and the signal line, and the position relative to the zero line.
- Bullish Crossover (Buy Signal): Occurs when the MACD line crosses above the signal line. This suggests increasing upward momentum.
- Bearish Crossover (Sell Signal): Occurs when the MACD line crosses below the signal line. This suggests increasing downward momentum.
- Zero Line Crossover: When the MACD line moves from below to above the zero line, it signals a potential shift to bullish momentum. Conversely, moving from above to below the zero line indicates a potential shift to bearish momentum.
Divergence can also be a powerful signal: bullish divergence (price makes lower lows, MACD makes higher lows) and bearish divergence (price makes higher highs, MACD makes lower highs).
Key Parameters
Short Period EMA: 12
Long Period EMA: 26
Signal Line Period: 9
MACD Strategy Example
A common strategy involves using MACD crossovers in conjunction with other indicators or price action for confirmation.
Buy Entry:
- Wait for the MACD line to cross above the signal line.
- Confirm that both lines are above the zero line, or are moving towards it from below.
- Consider price action confirmation (e.g., bullish candlestick patterns).
Sell Entry:
- Wait for the MACD line to cross below the signal line.
- Confirm that both lines are below the zero line, or are moving towards it from above.
- Consider price action confirmation (e.g., bearish candlestick patterns).
Stop-loss orders can be placed below recent swing lows for buy trades and above recent swing highs for sell trades.
Analyze MACD Performance