1. What is MACD?
MACD (Moving Average Convergence Divergence) is a technical analysis tool that determines market trends and buy/sell signals by calculating the difference between moving averages of different periods. It consists of three lines:
DIF Line (Fast Line): Usually the difference between the 12-day EMA (Exponential Moving Average) and the 26-day EMA.
DEA Line (Slow Line): The smoothed 9-day EMA of the DIF line.
Histogram: The difference between the DIF line and the DEA line, used to visually display the degree of divergence between the two.
2. Core Principles of MACD
The essence of MACD is to reflect the changes in bullish and bearish forces through the 'convergence' and 'divergence' of moving averages:
When the price rises, the short-term moving average (12 days) crosses above the long-term moving average (26 days), and the DIF line breaks above the DEA line, forming a 'Golden Cross'. At this time, the histogram turns from negative to positive, indicating that bullish strength is increasing.
When the price falls, the short-term moving average crosses below the long-term moving average, and the DIF line breaks below the DEA line, forming a 'Death Cross'. The histogram turns from positive to negative, indicating that bearish strength is dominant.
3. Main Uses of MACD
Trend Judgment
When both the DIF and DEA are above the 0 axis, the market is in a bullish trend; when both are below the 0 axis, the market is in a bearish trend.
Golden Cross / Death Cross signals near the 0 axis are usually more reliable than those further away from the 0 axis.
Buy and Sell Signals
Golden Cross Buy: DIF breaks above DEA from below, and the histogram turns from green to red, which may be a signal to rise (especially stronger when above the 0 axis).
Death Cross Sell: DIF breaks below DEA from above, and the histogram turns from red to green, which may be a signal to fall (especially weaker when below the 0 axis).
Top and Bottom Divergence
Top Divergence: The price makes a new high, but the MACD histogram peaks decline, suggesting insufficient upward momentum, and may be forming a top.
Divergence: The price makes a new low, but the MACD histogram's bottom rises, suggesting that the downward momentum is weakening and a bottom may be forming.
4. Advantages and Disadvantages of MACD
Advantages and Disadvantages 1. Filters out short-term fluctuations, suitable for medium to long-term trend judgments.
2. Divergence signals have high reference value for determining tops and bottoms.
3. The 0 axis is clearly defined, making bullish and bearish trends obvious. 1. Lags behind price movements, unsuitable for capturing short-term rapid market conditions.
2. Easily generates false signals in volatile markets.
3. When used alone, it needs to be verified with other indicators (such as volume, candlestick patterns).
5. Parameter Settings and Variants
Default Parameters: 12, 26, 9 (suitable for most markets).
Flexible Adjustment:
Short-term trading can reduce parameters (e.g., 8, 17, 6) to increase sensitivity;
Long-term trading can increase parameters (e.g., 21, 34, 8) to filter out noise.
Variant Indicators: Such as 'Dual-Line MACD' (using only DIF and DEA lines), 'MACD Histogram Acceleration' (focusing on the growth/shrinkage speed of the histogram).
6. Practical Considerations
Combining Cycles: Daily MACD signals can be confirmed with weekly trend analysis to avoid misjudgment of a single cycle.
Position Management: After a divergence signal appears, it is recommended to start with a light position for testing and wait for trend confirmation before increasing the position.
Market Characteristics: MACD performs better in single-direction trend markets (such as bull markets and bear markets); it should be used cautiously in volatile markets.
