1️⃣ What is the MACD?
MACD = Moving Average Convergence Divergence (Convergence/Divergence of Moving Averages).
It is a momentum indicator based on the difference between two exponential moving averages (EMA):
Fast EMA (12 periods)
Slow EMA (26 periods)
Base formula:
MACD = EMA(12) - EMA(26)
Then two more elements are constructed:
Signal line = EMA of 9 periods of the MACD.
Histogram = difference between the MACD line and the signal.
2️⃣ How to interpret it
The MACD provides clues about trend changes and movement strength:
1. Line crossing
If the MACD line crosses above the signal line → possible buy signal (indicates a shift to bullish momentum).
If the MACD line crosses below the signal line → possible sell signal (bearish momentum).
2. Position relative to level 0
MACD above 0 → dominant bullish trend (fast EMA > slow EMA).
MACD below 0 → dominant bearish trend.
3. Histogram (bars)
When positive bars grow → bullish strength increases.
When negative bars grow → bearish strength increases.
Change of color/height in the histogram may anticipate that the lines are about to cross.
3️⃣ Typical signals
Classic buy signal: MACD crosses the signal line upwards in negative territory (potential strong trend change).
Classic sell signal: MACD crosses the signal line downwards in positive territory.
Divergence:
If the price makes a higher high but the MACD makes a lower high → alert of weakening bullishness.
The same in downturns (contrary signal).
4️⃣ Pros and Cons
✅ Advantages:
Combines trend and momentum.
Works both on daily and intraday charts.
Helps to detect reversals and confirm trends.
⚠️ Limitations:
It is a lagging indicator because it uses moving averages.
In sideways markets, it generates many false signals.
It is best combined with supports/resistances or volume.
👉 The MACD is like a 'rhythm change detector' for the market:
Crosses → possible reversals.
Histogram → strength of movement.
Position relative to 0 → direction of trend.