Moving Average Convergence Divergence

(MACD)

◙ Primary Use: Trend-Following Momentum Indicator

◙ Trading: Trading Signals from MACD Crossovers | Slope Divergences (important)

◙ Standard Settings: 12-period Fast, 26-period Slow, and 9-period EMA

 

Introduction to MACD (Moving Average Convergence Divergence)

Developed by Gerald Appel in the 1970s, MACD is a trend-following momentum indicator and one of the most widely used technical analysis tools worldwide. This oscillator can evaluate the momentum of a trend and generate reliable trading signals.

• The MACD is the difference between a 26-day and a 12-day EMA (Exponential Moving Average).

• The Signal Line is a 9-day EMA that acts as a trigger for buying or selling.

• MACD can be used for trading any financial market (Forex, Equities, Commodities) across multiple timeframes.

There are two main ways to use MACD:

(a) A 2-line system (MACD and Signal Line) that focuses on their interaction.

(b) The MACD Histogram, which highlights crossovers above/below zero.

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The MACD Histogram

Developed by Thomas Aspray, the MACD-Histogram shows the distance between the MACD line and the Signal Line.

 

• MACD evaluates price action, while the Histogram shows what MACD is doing.

• The MACD-Histogram can be used as a signaling tool around the zero line (crossing above/below zero indicates a crossover).

• The higher the histogram value, the stronger the price momentum.

• MACD-Histogram divergences can indicate an upcoming MACD line crossover.

 

 

 Calculating the Moving Average Convergence Divergence

■ MACD Line = { Exponential Moving Average (12 periods) – Exponential Moving Average (26 periods) }

The MACD line is used as a measure of the convergence and the divergence of the fast and slow EMAs (Exponential moving averages)

■ Signal Line = { Exponential Moving Average (9 periods) of MACD Line }

The MACD signal line is used as an indicator of the directional change of the MACD line

■ MACD Histogram = MACD Line – Signal Line

The MACD histogram reflects the difference between the MACD line and the MACD signal line:

• The MACD histogram is positive when the MACD line is above the MACD signal line
• The MACD histogram is negative when the MACD line is below the MACD signal line

 

 

Trading with MACD

MACD uses 3 moving averages, enabling it to analyze price momentum effectively.

MACD can be used for:

• Identifying the trend

• Evaluating trend momentum

• Trading signals from MACD crossovers

• Divergences between price and MACD slopes

• Contrarian trading strategies

Timeframes

MACD works across multiple timeframes, excluding very short ones. Suggested timeframes include:

• M15, M30, H1, H4, and D1

• MACD signals are more reliable on H1 and H4 charts.

Evaluating The Momentum of the Trend

• When the two MACD lines move apart → momentum is increasing, and the trend strengthens.

• When the lines move closer → momentum is decreasing, and the trend weakens.

Trading MACD Line Crossovers

This is the simplest way to trade MACD:

• (↑) Buy when the MACD crosses above the Signal Line.

• (↓) Sell when the MACD crosses below the Signal Line.

→ Using the Histogram, a crossover above/below the Signal Line happens at zero (0).

 

Key Tips When Using MACD

These are some key tips when trading with the Moving Average Convergence Divergence:

1. Avoid using MACD on timeframes below M15.

2. The MACD Histogram is more beginner-friendly.

3. MACD may not generate reliable signals during very strong directional trends.

4. Divergence signals are more reliable than crossover signals.

5. Divergences work better on H1 and H4 (use lower timeframes for entries/exits).

6. Always confirm MACD signals using price action techniques:

   • Support/Resistance Breakouts

   • Channel Breakouts

   • Volume Breakouts (Equities)

   • Candlestick Formations (Find more here about candles)

   • RSI on lower timeframes (e.g., H1 MACD with M15 RSI)

7. In trending markets, the MACD lines will move away from each other, while in ranging markets, the two MACD lines will come close to each other

8. Alternative MACD settings include: 8 | 17.5 | 9

 

Platform Setup

You can install the 'MACD' or'MACD HISTOGRAM' directly in MetaTrader-4 or MetaTrader-5:

(i) CLASSIC (2-LINE) MACD SYSTEM

□ GO TO → INDICATORS → OSCILLATORS → MACD

□ STANDARD SETTINGS → 12,26,9

(ii) MACD HISTOGRAM

□ GO TO → INDICATORS → CUSTOM → MACD HISTOGRAM

□ STANDARD SETTINGS → 12,26,9

 

■ The Moving Average Convergence Divergence

George Protonotarios, financial analyst

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