Moving Average Convergence/Divergence (MACD)

What is MACD Indicator and how it is used?

The technical indicator MACD (Moving Average Convergence Divergence) - refers to the group of oscillators. To construct the MACD graph, two exponential moving averages (EMA) are used: "fast" (with a period of 12) and "slow" (with a period of 26).

MACD is the difference between the 12-period and 26-period exponential moving averages (EMA), and the result will be displayed in the form of bars (histograms), which are the main MACD line. Standard MACD indicators have one additional line, called "signal", which is a simple moving average with a period of 9, by default.

The movement in the direction of the zero value of the bars on the histogram is called convergence. The opposite phenomenon, when the bars of the histogram grow, and with them the distance between the 12-period and 26-period EMA, is called divergence. Hence the name of the technical indicator is MACD - Moving Average Convergence Divergence.

Moreover, the greater the divergence of the curves, i.e. the longer the bars, the more pronounced the trend. Therefore, if after crossing the curves start to divergence strongly, then this indicates the formation of a new trend and can be considered as a trading signal to buy or sell, depending on the direction of the trend movement (bullish or bearish).

Overbought-oversold state

MACD is also very valuable, as an indicator of overbought-oversold. When the "fast" moving average rises (falls) significantly higher (lower) "slow" (ie MACD bars grow in the positive or negative sides), this means that the price is likely too high and will soon return to a more realistic level.

MACD Simple Signals

  • Signal to buy appears when MACD crosses zero line from bottom to top
  • Signal to sell appears when MACD crosses zero line from top to bottom
  • If the MACD bars and Signal Line are above the zero line and the histogram crosses the signal line from bottom to top, this is the signal to buy
  • If the MACD bars and Signal Line are below the zero line and the histogram crosses the signal line from bottom to top, this is the signal to buy
  • If the MACD bars and Signal Line are above the zero line and the histogram crosses the signal line from top to bottom, this is the signal to sell
  • If the MACD bars and Signal Line are below the zero line and the histogram crosses the signal line from top to bottom, this is the signal to sell

MACD Strong Signals - Divergence

When there is a divergence between the MACD and the price, this indicates a probability of an early end of the current trend.

Bullish divergence occurs when the new price maximum is not confirmed by a new maximum of the indicator, i.e. the next peak of the price is higher than the previous one, and the next peak of the MACD bars is lower than the previous one. In other words, a bullish divergence occurs when the MACD histogram forms new highs, and the price fails to form them. This is a direct evidence of the weakness of the bullish trend. A divergence usually comes with a correction, less often a trend reversal.

Bearish divergence is formed when the new minimum price is not confirmed by a new minimum indicator, i.e. the next value of the price is lower than the previous one, and the next value of the indicator is higher than the previous one. In other words, the bearish divergence is the situation when the histogram forms new lows, and the price does not manage to form them. Bearish discrepancy indicates a weakness in the bearish trend. Divergences in overbought and oversold areas are considered to be the strongest and most significant signals.

Like all technical analysis indicators, which are based on moving averages, MACD is no exception and also delays the signals. However, despite this, it is one of the most frequently used indicators in the technical analysis of the currency market.

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