An introduction to the MACD indicatorHere is my quick and dirty introduction/explanation of what the Moving Average Convergence Divergence (MACD) indicator………… indicates.
The Moving Average Convergence Divergence (MACD) is a trend following momentum indicator that follows the intimate relationship between a 12-Period EMA and a 26-Period EMA on a price chart in whatever timeframe you are in.
The MACD indicator is made up of 6 parts, the MACD Line, the Signal Line, the Histogram, the 0.00 Base Line, the Positive Zone and the Negative Zone.
As default, the MACD Line is calculated by subtracting the value of a 26-Period EMA from the value of a 12-Period EMA on your chart to give you your MACD Line value. The MACD indicator will give a MACD Line value in whatever timeframe you are in.
The Signal Line is a 9-Period EMA of the MACD Line and is used with the MACD Line to generate/trigger Buy and Sell Signals. If the MACD Line crosses ABOVE the Signal Line, that is considered a Buy Signal. If the MACD Line crosses BELOW the Signal Line, that is considered a Sell Signal. Note that Buy and Sell Signals can be generated in both the Positive and Negative Zones
The Histogram is a graphical representation of the distance between the MACD Line and the Signal Line (9-Period EMA).
Green Histograms will appear above the 0.00 Base Line when the MACD Line crosses ABOVE the Signal Line. The Green Histograms will Increase in size the further the MACD Line moves upwards & away from its Signal Line. The Green Histogram will also lighten in colour if the MACD Line fails to move higher to create a higher Green Histogram Bar.
Red Histograms will appear below the 0.00 Base Line when the MACD Line crosses below the Signal Line. The Red Histograms will increase in size the further the MACD Line moves downwards & away from its Signal Line. The Red Histogram will also lighten in colour if the MACD Line fails to move lower to create a lower Red Histogram Bar.
The Positive Zone is the area ABOVE the 0.00 Base Line. If the MACD Line crosses above the 0.00 Base Line, this means that a 12-Period EMA is ABOVE a 26-Period EMA on your price chart in whatever timeframe you are in. So to reiterate, the MACD Line will be ABOVE the 0.00 Base Line when a 12-Period EMA is ABOVE a 26-Period EMA on your price chart.
The Negative Zone is the area BELOW the 0.00 Base Line. If the MACD Line crosses below the 0.00 Base Line, this means that a 12-Period EMA is BELOW a 26-Period EMA on your price chart in whatever timeframe you are in. So to reiterate, the MACD Line will be BELOW the 0.00 Base Line when a 12-Period EMA is BELOW a 26-Period EMA on your price chart.
Note that the MACD indicator has no upper limit in the Positive Zone and no lower limit in the Negative Zone.
The MACD indicator can also be used to show Divergence between the Price and the MACD Line. In a Bullish scenario, if the Price is making Lower Lows and the MACD Line is making Higher Lows then this is potentially Bullish.
For a Bearish scenario, if the Price is making Higher Highs and the MACD Line is making Lower Highs then this is potentially Bearish.
The MACD indicator can also be used to show Hidden Divergence between the Price and the Histogram. In a Bullish scenario, if the Price is making Higher Lows but the Histogram is making Lower Lows then this is potentially Bullish. For a Bearish scenario, if the Price is making Lower Highs but the Histogram is making Higher Highs then this is potentially Bearish.
The MACD can sometimes produce false positive as can be seen here where we have Bullish Divergence with the Price Converging with the MACD Line but no real breakout happened.
Note that the MACD Line and Signal Line will be in line with the current Candle Wick in whatever timeframe you are in.
The MACD indicator is a lagging indicator but it also has the power to be predictive especially with potential upcoming Buy and Sell signals, divergence and when used with other indicators like Volume, the Ichimoku Cloud, Bollinger Bands, MAs or EMAs, RSI, ADX DI to name but a few as these can help complement the MACD signals to help get a much clearer picture as to what is going on and what may happen on your chart in whatever timeframe you are in, because there is a lot of BS, FUD, FOMO and utter crap out there so a little clarity is always helpful ;-)
For me the MACD is a very useful indicator with my trading, so I hope you have found this quick and dirty MACD educational post helpful. Happy trading.
Notes:
MACD Line = 26-Period EMA Value - 12-Period EMA Value = MACD Line Value
Signal Line = 9-Period EMA of the MACD Line. Used with the MACD Line to trigger Buy and Sell Signals
Histogram = Distance between the MACD Line and the Signal Line
0.00 Base Line = Crossover point to the Positive Zone and/or Negative Zone
Positive Zone = a 12-Period EMA is ABOVE a 26-Period EMA on your price chart
Negative Zone = a 12-Period EMA is BELOW a 26-Period EMA on your price chart
EMA = Exponential Moving Average.
