# When To Use And How To Read The Macd Indicator

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Example of historical stock price data with the typical presentation of a MACD indicator . The blue line is the MACD series proper, the difference between the 12-day and 26-day EMAs of the price. The red line is the average or signal series, a 9-day EMA of the MACD series. The bar graph shows the divergence series, the difference of those two lines. The signal line is calculated as a 9-day exponential moving average of MACD. The MACD moving average crossover is one of many ways to interpret the MACD technical indicator.

It is used to identify overbought and oversold conditions. The two red circles show the contrary signals from each indicator. Note in the first case, the moving average convergence divergence gives us the option for an early exit, while in the second case, the TRIX keeps us in our position. If yes, then you will enjoy this comprehensive guide to one of the most widely used technical trading tools – the moving average convergence divergence . A “signal-line crossover” occurs when the MACD and average lines cross; that is, when the divergence changes sign.

## Moving Average Overbought

A potential buy signal is generated when the MACD crosses above the MACD Signal Line . Another potential buy and sell signal is shown in the graph above in the Nasdaq 100 exchange-traded fund QQQQ chart. When the MACD crosses below the zero line, then a possible sell signal is generated. The primary method of interpreting the MACD is with moving average crossovers. We explore what the MACD indicator looks like on an example chart and how you can read it to gain trading insight.

- Third, notice that the MACD formed a higher low as Google formed a lower low in November.
- Unless otherwise indicated, all data is delayed by 15 minutes.
- Here’s where traders use the concept of divergence to make an educated guess about possible reversal.
- The second is the number of periods that are used in the slower moving average.
- With a MACD chart, you will usually see three numbers that are used for its settings.

A less sensitive MACD will still oscillate above/below zero, but the centerline crossovers and signal line crossovers will be less frequent. Below we see Gamestop with a large bearish divergence from August to October. The stock forged a higher high above 28, but the MACD line fell short of its prior high and formed a lower high.

## Chapter 8: Using Macd To Forecast Major Trend Changes

A bullish crossover occurs when the MACD turns up and crosses above the signal line. A bearish crossover occurs when the MACD turns down and crosses below the signal line. Crossovers can last a few days or a few weeks, depending on the strength of the move. To resolve the inconsistency between entry and exit, a trader can use the MACD histogram for both trade entry and trade exit signals. Moving average convergence divergence , invented in 1979 by Gerald Appel, is one of the most popular technical indicators in trading.

Essentially, it calculates the difference between an instrument’s 26-day and 12-day exponential moving averages . Of the two moving averages that make up the MACD, the 12-day EMA is obviously the faster one, while the 26-day is slower. In the calculation of their values, both moving averages use the closing prices of whatever period is measured.

The direction, of course, depends on the direction of the moving average cross. Positive MACD indicates that the 12-day EMA is above the 26-day EMA. Positive values increase as the shorter EMA diverges further from the longer EMA.

## Tips To Developing A Macd Trading Strategy

We also review and explain several technical analysis tools to help you make the most of trading. In the example above, the yellow area shows the MACD line in negative territory as the 12-day EMA trades below the 26-day EMA. The initial cross occurred at the end of September and the MACD moved further into negative territory as the 12-day EMA diverged further from the 26-day EMA. The orange area highlights a period of positive MACD values, which is when the 12-day EMA was above the 26-day EMA.

## Related Terms

When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with. One of the reasons traders often lose with this setup is that they enter a trade on a signal from the MACD indicator but exit it based on the move in price. Since the MACD histogram is a derivative of price and is not price itself, this approach is, in effect, the trading version of mixing apples and oranges. The true strength index is a momentum oscillator used to provide trade signals based on overbought/oversold levels, crossovers, and divergence.

## Macd Moving Average Convergence

Analysts will also vary the parameters of the MACD to track trends of varying duration. In addition to bearish and bullish divergences, the MACD might confirm price movement as well. Notice in this example how closely the tops and bottoms of the MACD histogram are to the tops of the Nasdaq 100 e-mini future price action.

## Terminology

Traders may buy the security when the MACD crosses above its signal line and sell—or short—the security when the MACD crosses below the signal line. Moving average convergence divergence indicators can be interpreted in several ways, but the more common methods are crossovers, divergences, and rapid rises/falls. If you don’t know how an EMA works, you might want to read this post I wrote about moving averages and how to calculate them. The simple way to think about a moving average is that it smoothes out price data over time. An exponential moving average gives more weight to recent price movements. The most important signal of the moving average convergence divergence is when the trigger line crosses the MACD up or down.

## What Is Moving Average Convergence Divergence Macd?

The subsequent signal line crossover and support break in the MACD were bearish. On the price chart, notice how broken support turned into resistance on the throwback bounce in November . This throwback provided a second chance to sell or sell short. Due diligence is required before relying on these common signals. Signal line crossovers at positive or negative extremes should be viewed with caution.

This technical analysis guide explains what the moving average convergence divergence indicator is, and how traders use it to exercise trading strategies. The moving average convergence divergence oscillator is one of the most popular technical indicators. The Moving Average Convergence/Divergence indicator is a momentum oscillator primarily used to trade trends.

The RVI is an oscillator that correlates a security’s closing price to its price range. Divergence may not lead to an immediate reversal, but if this pattern continues to repeat itself, a change is likely around the corner. Notice how the MACD stock indicator stayed above the zero line during the entire rally from the low 6000 range all the way above 11,600. As a general rule of thumb, if the MACD is below the zero line, do not open any long positions. Well, the MACD trading strategy is firmly rooted in this old trading adage.