The MACD (Moving Average Convergence Divergence) is one of the most used technical indicators in technical analysis.

To master this indicator like a pro you must understand the following aspects that I will develop below:

1. Components of MACD

2. Interpreting MACD signals

3. Indicator settings

4. Precautions

Components of MACD

The MACD is a combination of moving averages that seeks to capture the trend and momentum of an asset. It is composed of three main elements:

1. MACD line (blue line):

   It is the difference between two exponential moving averages (EMA). The following are generally used:

   1. Fast EMA: 12 periods.

   2. Slow EMA: 26 periods.

   
   
   MACD line = EMA(12) − EMA(26)
   
   

2. Signal Line (red line):

   It is an exponential moving average of the MACD line, usually 9 periods. It is used to generate buy or sell signals.

Signal Line = EMA(9) of MACD line

1. Histogram:

   Shows the difference between the MACD line and the signal line. It is useful for visualizing the strength of trends.

Histogram = MACD Line − Signal Line

Interpreting MACD signals

1. Line crossings:

   • Bullish Crossover: When the MACD line crosses the signal line from bottom to top. This indicates a possible change towards an uptrend.

   • Bearish Crossover: When the MACD line crosses the signal line from top to bottom. This suggests a possible bearish trend.

   

2. Intersection with axis 0:

   • MACD Above 0: Suggests that the fast EMA is above the slow EMA, which may indicate an uptrend.

   • MACD below 0: Suggests that the slow EMA is above the fast one, which may indicate a bearish trend.

   
   
   

   

3. Divergences:

   
   
   There are three types of divergence: classic or regular, hidden and extended.

   1. Classic or regular: indicates an early trend reversal

      • Classic Bullish Divergence: When the price forms lower lows, but the MACD forms higher lows. This may signal a bullish reversal.

      • Classic Bearish Divergence: When price forms higher highs, but MACD forms lower highs, indicating a possible bearish reversal.

   2. Hidden: indicates the continuation of the current trend
      

      • Bullish Hidden Divergence: When the price forms higher lows, but the MACD forms lower lows. This may signal a possible continuation of the uptrend.

      • Bearish Hidden Divergence: When price forms lower highs, but MACD forms higher highs, indicating a possible continuation of the downtrend.

   3. Extended: Most common in a sideways trend and indicates a continuation of the last trend.

Indicator settings

Although standard settings (12, 26, 9) are the most common, in a professional trading environment, you can adjust these parameters depending on the volatility of the asset and the time frame.

Volatile markets: (5, 13, 8)

Stable markets: (21, 55, 9).

Precautions

The MACD is a great tool, but it is not infallible. That is why professional traders combine it with other indicators and technical analysis to improve the accuracy of their trades.

In future articles I will develop some strategies that use MACD to increase the accuracy of market entries and exits.