In this article you will learn what the Moving Average Convergence Divergence indicator, or MACD for short, is. It is one of the most popular and used technical analysis tools. We'll cover everything about the MACD indicator, from how to calculate it and how to read it correctly, to how to use the MACD indicator when trading live. We will cover the explanation of the MACD indicator and all its basics within a reading time not exceeding 10 minutes.

Why is it important to be aware of Moving Average Convergence Divergence? The reason behind this is; Being aware of what the MACD indicator is, its definition, formula, and calculation method can help you spot powerful signals like crossover or divergence. Learning to use the indicator to accurately predict the formation of new trends in the market will greatly improve your trading. The beginning of a trend is usually the area where the most money is made after all. For beginner technical traders, we suggest an easier way to take advantage of the MACD indicator by using its histogram. In addition, we will also explain how to work with the indicator settings.

What is the MACD indicator?

Although it is an invaluable part of most technical analysis-based traders' tools, many are still ignorant of the exact definition of the MACD indicator. MACD is a trend-following momentum oscillator and is applied to the price of a particular security using two moving averages to try to detect the formation of a new trend.

On a trading chart, MACD is represented as two swing lines without limits. The shorter line is the 12-period Exponential Moving Average (EMA) and it moves faster and is responsible for most MACD movements. While the longer one is the 26-period EMA which reacts more slowly to price changes.

To fully understand what the MACD indicator is, we first have to take a look at why it is so popular among traders. Since it is unlimited and despite being a momentum oscillator, it is not used to identify overbought (overbought) or oversold (oversold) markets. By combining two trend-following exponential moving averages into a momentum oscillator, the MACD essentially combines the best of both worlds and acts as both a trend-following indicator and a momentum indicator at the same time.

EMAs gravitate around the zero line, intersect, diverge, and sometimes converge. By monitoring these movements, traders can identify key trading signals such as divergence, midline, or signal line intersection. In this way, the indicator helps you be aware that an upward/or downward trend is about to occur.

How to read the MACD indicator

In order to be able to understand moving average convergence divergence in detail, it is important to be able to read its components on a chart. The indicator consists of three elements moving around the zero line: the MACD line, the signal line and the histogram. Here's more about each of them:

  • MACD Line (12 period EMA – 26 period EMA) – helps traders identify upcoming bullish and bearish market trends;

  • Signal Line (9-EMA MACD Line) – analyzed in addition to the MACD line to help identify trend reversals and determine the best entry and exit points;

  • Histogram (MACD line – signal line) – Histogram provides a graphical representation of the convergence and divergence of the previous two, MACD and signal lines;

Each of these lines has a separate value. A MACD line with a positive value indicates that the shorter EMA is above the longer EMA. The further the shorter EMA is from the longer one, the higher the increase in the positive value of the MACD line. It is an indicator of increasing upward momentum. On the other hand, a negative value of the MACD indicator indicates that the shorter EMA line is below the longer EMA line. Again, negative values ​​increase as the two lines get further apart. In this case, we have increasing downward momentum.

Depending on the movement of the exponential moving averages (linear EMA), the correlation between them may be divergence or convergence. Divergence occurs when they move away from each other, while convergence occurs when they move closer together.

How to use the MACD indicator?

The truth is that MACD divergence is one of the most powerful forecasting indicators. This is why knowing how to use MACD and how to interpret its signals can improve the performance of your trading strategy. 

The MACD indicator can be used to identify three types of signals: signal line crossovers, zero line crossovers, and divergence. We'll delve into each in the following sections.

Before that, we will focus on some things you should look at when using MACD:

  • Crossover point – If the MACD crosses the zero line up, the signal is bullish. If the MACD crosses the zero line down, this indicates that bears are dominating the market.

  • Where to turn from – If the MACD turns from above zero to down, this is a bearish signal. On the other hand, if the MACD line shifts from below the zero line to above it, it is considered a bullish signal.

  • Crossover direction – If the MACD crossover direction is from bottom to top, the signal is bullish and vice versa. The farther away from zero, the stronger the signal generated.

Well, that's great, but what about real trading signals? The hardest part to master with each trading indicator is knowing the best moments to place buy and sell orders.


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