What is MACD?
MACD, or Moving Average Convergence-Divergence, is an indicator that tracks the relationship between two exponential moving averages over different periods (usually 12 and 26). It's made up of three parts: the MACD line, the signal line (a 9-period moving average of the MACD line), and a histogram that plots the gap between these two lines as bars.
How it's calculated
The MACD line comes from subtracting the 26-period EMA from the 12-period EMA. A 9-period exponential moving average is then taken of that same line, called the signal line. The histogram is nothing more than the numerical gap between the MACD line and the signal line, plotted as bars.
How to read the chart
When the MACD line is above zero, it means the short-term average is above the long-term average and the market is in a bullish phase; being below zero signals a bearish phase. Growing histogram bars show increasing momentum in the direction of the current trend, and shrinking bars show weakening momentum.
Trading signals
A crossover between the MACD line and the signal line is this indicator's most common signal; the MACD line crossing from below to above the signal line is considered a bullish signal, and the reverse crossover is a bearish signal. The MACD line crossing the zero level can also signal an overall change in trend phase. Divergence between MACD and price, similar to RSI, is also considered one of this indicator's valid signals.
Strengths and limitations
MACD shows trend and momentum information at a glance simultaneously, which makes it a versatile, all-purpose tool. But like most moving-average-based indicators, it's inherently laggy, and in trendless, choppy markets it can produce frequent false signals.
Practical tip
MACD crossovers on higher timeframes are usually more reliable than on lower timeframes; to filter out weak signals, many traders wait for the candle to close after the crossover to avoid a false signal.