MACD (Moving Average Convergence Divergence)
A trend-following momentum indicator that shows the relationship between two moving averages. Traders use MACD crossovers to identify trend changes.
MACD (Moving Average Convergence Divergence)
MACD is a trend-following momentum indicator that shows the relationship between two exponential moving averages. It helps traders identify trend changes, momentum shifts, and entry/exit points.
Formula
MACD Line = 12-day EMA - 26-day EMA Signal Line = 9-day EMA of MACD Line MACD Histogram = MACD Line - Signal Line
The chart displays three components: the MACD line, the signal line (a moving average of MACD), and the histogram (the difference between them).
Example
The Nasdaq-100 ETF (QQQ) often moves with clear MACD signals. When QQQ's 12-day EMA crosses above its 26-day EMA, the MACD line crosses above zero, signaling a potential uptrend. When the MACD line crosses below the signal line (9-day EMA of MACD), traders see a sell signal.
How to Interpret It
- MACD line above signal line: Uptrend momentum. When the MACD crosses above the signal line, traders watch for a buy signal.
- MACD line below signal line: Downtrend momentum. A cross below the signal line suggests a sell signal.
- MACD above zero: Bullish; the 12-day EMA is above the 26-day EMA.
- MACD below zero: Bearish; the 12-day EMA is below the 26-day EMA.
- Histogram size: A growing histogram (bars getting taller) shows momentum strengthening; shrinking bars show momentum weakening.
- Divergences: If price hits a new high but MACD doesn't, the divergence suggests the uptrend is weakening.
Limitations
- MACD lags price because it uses moving averages, which smooth out data.
- In choppy, sideways markets, MACD produces many false signals.
- A single MACD crossover doesn't guarantee a trend change; many false signals occur.
- MACD works better on longer timeframes (daily charts) than on very short timeframes (5-minute charts).