How to Use the MACD Indicator

how to read macd

This is called a MACD divergence because the faster moving average (MACD Line) is “diverging” or moving away from the slower moving average (Signal Line). When the two MACD lines are above the 0-line, the price can be considered in an uptrend. And when the two MACD lines are below the 0-line, the price is in a downtrend.

  1. MACD buy signals happen when the MACD crosses from below to above the signal line.
  2. Divergences between a price chart and the MACD mean the two are moving in opposite directions.
  3. The highest quality signals often occur when the MACD line is far above zero when the bearish crossover occurs.
  4. Bullish divergences tend to lead to price reversals, possibly signaling a change in the trend.
  5. Traders may draw trendlines on the MACD chart to demonstrate peaks and troughs in MACD momentum.

The MACD indicator – How To Trade with it

how to read macd

Some traders will look for bullish divergences even when the long-term trend is negative because they can signal a change in the trend, although this technique is less reliable. When MACD forms highs or lows that exceed the corresponding highs what are the main technique are price level accounting and lows on the price, it is called a divergence. A bullish divergence appears when MACD forms two rising lows that correspond with two falling lows on the price. This is a valid bullish signal when the long-term trend is still positive.

MACD Histogram Helps Determine Trend Changes

The movement of price can provide evidence of the current trend, however changes in momentum as evidenced by the MACD can sometimes precede a significant reversal. Finally, the histogram is determined by subtracting the signal line from the MACD line. This is easier to interpret than looking at the two lines alone, since it is sometimes difficult to tell if one curve is steeper than the other. The histogram is positive when MACD is higher than its nine-day EMA, and negative when it is lower.

How To Use Moving Average Crossover To Spot Buy Signals

This helps traders identify potential entry and exit points by highlighting changes in momentum more clearly than the standard MACD. A MACD positive (or bullish) divergence is a situation in which MACD does not reach a new low, despite the price of the stock reaching a new low. The MACD uses three exponential moving averages (a short term, a long term, and the average difference between the short and long term) to show price momentum. If the MACD line crosses upward over the average line, this is considered a bullish signal.

Firstly, divergence can often signal a false positive, i.e., a possible reversal, but no actual reversal occurs. This is because prices often demonstrate a few surges or plunges as market participants set off stops to match the supply and demand in the order flow. Secondly, divergence doesn’t forecast all reversals, i.e., it predicts too many reversals that don’t occur and not enough real price reversals.

The default 12, 26, and 9 settings of the MACD can be adjusted to create more or fewer signals from the indicator. Shorter values generate more signals, while longer values create fewer signals. The MACD can be calculated on any timeframe from intraday, daily, weekly, or other data points. Values above zero are typically bullish and indicate an uptrend, while MACD values below zero indicate a downtrend. The signal line is very similar to the second derivative of price with respect to time or the first derivative of the MACD line with respect to time. Moreover, the acceleration analogy works in this context as acceleration is the second derivative of distance with respect to time or the first derivative of velocity with respect to time.

Because there are two moving averages with different “speeds”, the faster one will obviously be quicker to react to price movement than the slower one. As the moving averages get closer to each other, the histogram gets smaller. This is called convergence because the faster moving average (MACD Line) is “converging” or getting closer to the slower moving average (Signal Line). In our example above, the MACD Line is the difference between the 12 and 26-period moving averages.

A double top is often accompanied by a bearish divergence in momentum. The MACD’s slowing momentum as price makes the second high foreshadows the subsequent price decline. MACD buy signals happen when the MACD crosses from below to above the signal line.