MACD

What MACD shows

MACD, created by Gerald Appel in the late 1970s, measures the distance between a fast and a slow exponential moving average (EMA). When the fast EMA pulls away from the slow one, momentum is building. When they converge, momentum is fading.

The three parts

• MACD line: the 12-period EMA minus the 26-period EMA.
• Signal line: a 9-period EMA of the MACD line.
• Histogram: the MACD line minus the signal line, drawn as bars.

How traders read it

Zero-line position

MACD above zero means the fast average is above the slow average, which describes an uptrend. Below zero describes a downtrend. Many traders only look for longs when MACD is above zero.

Signal-line crossovers

A cross of the MACD line above the signal line is a bullish momentum shift; a cross below is bearish. Crossovers come late, because they're built from averages of averages, and they fire constantly in sideways markets.

The histogram

Shrinking histogram bars show momentum slowing before a crossover happens. Some traders use this to tighten stops or take partial profits.

Divergence

As with RSI, a higher price high paired with a lower MACD high warns that the trend is weakening. Wait for price confirmation before acting.

Common mistakes

• Taking every crossover in a range. Check the trend on a higher timeframe first.
• Comparing MACD values across instruments. The values are in price units, so a reading of 0.002 on EUR/USD and 15 on the Nasdaq aren't comparable.
• Ignoring that MACD lags. It confirms, it doesn't anticipate.

Putting it to work

MACD pairs well with price structure: trade pullbacks in the direction of a positive MACD, and use crossovers as timing only when price is at a level you already care about. See it applied in the trend following strategy.