Moving Average Convergence Divergence (MACD)
A trend-following momentum indicator that shows the relationship between two moving averages of price.
Plain English Explanation
MACD is like having two runners on a track - a fast one and a slow one. When the fast runner crosses ahead of the slow one, momentum is building. When they get close together, momentum is fading.
**The three parts:**
1. **MACD Line** (Blue) - The difference between 12 and 26-period EMAs
2. **Signal Line** (Orange) - 9-period EMA of the MACD line
3. **Histogram** - Visual of the distance between MACD and Signal
**How to read it:**
- MACD crosses above Signal = Bullish momentum building
- MACD crosses below Signal = Bearish momentum building
- Histogram growing = Momentum strengthening
- Histogram shrinking = Momentum weakening
**The zero line matters:** When MACD is above zero, the trend is generally up. Below zero, the trend is generally down.
How It Works (Technical)
MACD subtracts the 26-period EMA from the 12-period EMA. A 9-period EMA of this result (Signal line) is then plotted. The histogram shows the difference between the MACD and Signal lines, making crossovers easier to spot.
When It Works Best
- Trending markets (up or down)
- Identifying trend changes early
- Confirming the strength of a move
- Spotting divergences with price
- Medium to longer timeframes (4H, Daily, Weekly)
When It Fails
- Choppy, range-bound markets (lots of false signals)
- Very short timeframes (too many whipsaws)
- During consolidation periods
- News-driven price spikes
- When trends change quickly
Common Beginner Mistakes
- 1Trading every crossover without considering the trend
- 2Ignoring the histogram (it often signals changes before crossovers)
- 3Using MACD alone without price action confirmation
- 4Not adjusting settings for different assets
- 5Expecting MACD to predict exact reversal points
Pro Tips
- Watch for histogram divergence before price divergence
- Zero-line crossovers are stronger signals than MACD/Signal crossovers
- Use histogram shrinking as early warning of momentum loss
- Combine with RSI for better timing
- In strong trends, use MACD histogram peaks/troughs for entries
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