The Moving Average Convergence Divergence, called the MACD for short, is a widely used technical analysis indicator that helps traders identify trend direction, momentum shifts, and potential buy or sell signals in crypto markets.
- Type of Indicator: Momentum Oscillator
- Creator: Gerald Appel
- When Created: Late 1970s
- Mentioned In: Technical Analysis: Power Tools for Active Investors
What Is The MACD? Moving Average Convergence/Divergence Explained
The Moving Average Convergence Divergence is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price.
The Moving Average Convergence Divergence is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. The result of that calculation is the MACD line.
A nine-day EMA of the MACD, called the “signal line,” is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals.
Traders may buy the cryptocurrency when the MACD crosses above its signal line and sell – or short – the cryptocurrency when the MACD crosses below the signal line. The Moving Average Convergence Divergence helps investors understand whether the bullish or bearish momentum is increasing in the asset.
How Do You Read Moving Average Convergence/Divergence?
The Moving Average Convergence/Divergence provides traders with valuable information about the momentum and potential reversal points in a market.
The Moving Average Convergence Divergence indicator displays two lines—the MACD line and the signal line. These two lines crossing over each other act as trading signals.
Here are the tool’s standard buy and sell signals:
Buy Signal: When the MACD line crosses above the signal line, it generates a buy signal as it indicates that the bullish momentum is increasing.
Sell Signal: When the MACD line crosses below the signal line, it generates a sell signal as it indicates that the bearish momentum is increasing.
The MACD line crossing the midpoint (the zero line) can also act as a trading signal. When the MACD line crosses above zero, it gives a buy signal and when it crosses below zero, it gives a sell signal.
The length of time the MACD line stays above or below the signal line shows how strong the trend is. The longer the MACD line stays above the signal line, the stronger the uptrend. The longer it stays below the signal line, the stronger the downtrend.
In addition to identifying potential trend reversals, the tool can also help traders confirm the strength of a trend. If the MACD consistently stays above the signal line during an uptrend or below the signal line during a downtrend, it can signal the continuation of the prevailing trend.
How Does The Moving Average Convergence/Divergence Work?
The Moving Average Convergence Divergence is based on the gap between the 12-period EMA and 26-period EMA. A moving average acts as a trend indicator by smoothing out the price action into one flowing line. As the EMAs come closer together or move further apart, it indicates that a change in the trend may be about to happen.
Here is how the indicator works:
- When the shorter-term 12-period EMA starts to advance faster than the longer-term 26-period EMA, it is a signal that the uptrend in prices is accelerating. This will cause the MACD line to rise and move above the signal line for a buy signal.
- Conversely, if the 12-period EMA starts to decline faster than the 26-period EMA, the speed of the downtrend is increasing. This will cause the MACD line to fall below the signal line for a sell signal.
- When the 12-period EMA and the 26-period EMA draw closer together, price momentum is decreasing. A convergence between the EMAs can signal that a trend change may be ahead.
- As price momentum starts shifting direction, the MACD line will cut across the signal line, triggering a crossover trade signal. The crossover indicates that momentum is changing from bullish to bearish or bearish to bullish.
How Is The MACD Calculated?
The Moving Average Convergence Divergence indicator is calculated by subtracting the 26-period EMA from the 12-period EMA. A 9-day EMA of the MACD, called the signal line, is then plotted on top of the MACD line.
Here is the step-by-step calculation:
- Calculate the 12-period EMA of the security’s closing price.
- Calculate the 26-period EMA of the security’s closing price.
- Subtract the 26-period EMA from the 12-Period EMA to get the MACD line. MACD Line = 12-Period EMA – 26-Period EMA.
- Calculate the 9-day EMA of the MACD line to get the Signal line.
The standard Moving Average Convergence Divergence indicator’s parameters (12, 26, 9) can be adjusted as needed to suit the security or timeframe being analyzed. Shorter moving averages will react more quickly to price changes compared to longer moving averages.
How Do You Use The Moving Average Convergence Divergence?
The Moving Average Convergence Divergence indicator can be used in three main ways:
Crossover Signals: The basic Moving Average Convergence Divergence trading signal occurs when the MACD line crosses above or below the signal line. Buying when the MACD crosses above its signal line or selling when it crosses below the signal line can signal a momentum change.
Divergence: The MACD can form a divergence when it is moving away from the price action. For example, if the price hits a new high but the MACD forms a lower high, it is a bearish divergence that indicates waning upside momentum.
Zero Line Crossover: When the MACD crosses above or below the zero line, it can signal the trend is reversing direction. Above zero indicates a bullish bias, while below zero indicates a bearish bias.
The Moving Average Convergence Divergence will react faster to changing price trends compared to moving average indicators since it shows the difference between the 12 and 26-period EMAs rather than a smoothed moving average.
Additional Moving Average Convergence/Divergence Tips
Moving Average Convergence/Divergence may not work well in sideways or range-bound markets, as it can generate false signals.
Be cautious when using the Moving Average Convergence/Divergence in isolation, as it may not provide a complete picture of the market’s behavior.
Remember that the Moving Average Convergence/Divergence is a lagging indicator, meaning it reacts to price movements that have already occurred.
The standard Moving Average Convergence Divergence parameter setting is 12, 26, 9. However, it’s possible to customize the indicators based on your trading style or security being analyzed.
Avoid taking MACD trades against the dominant trend. The MACD is best used when trading in the direction of the higher time frame trend.
The tool’s histogram shows when momentum is increasing or decreasing by plotting the difference between the MACD and its signal line.
Always consider other factors and use proper risk management techniques to protect your investments. Utilize technical analysis software such as TradingView.
Moving Average Convergence Divergence FAQ
What timeframes is the indicator useful on?
The tool can be used on charts ranging from 1-minute to weekly. Shorter timeframes (5-15 mins) will produce the most signals but have higher risk. Longer timeframes (4H, daily, weekly) produce the highest-quality signals.
What trading strategies can utilize the MACD indicator?
The Moving Average Convergence Divergence can be incorporated into trend, momentum, and mean reversion strategies. It works well with breakout, swing, day, and scalping styles.
Should I take the trade as soon as I see a MACD crossover signal?
Price confirmation should be paired with MACD signals to avoid false signals. Allow the MACD crossover to develop and let price close above/below the signal lines before acting.
Can I use MACD divergence signals without crossover signals?
Yes. Divergence warns of a momentum shift and can be a powerful trade signal. Not all divergences result in crossovers, so it can identify changes sooner.