The moving average convergence divergence (MACD) is a trend-following momentum oscillator that can help you spot turning points in a security’s overall trend. The MACD also helps you visualize the trend’s change, direction, and magnitude.
When combined as part of a trading system, the oscillator generates signals from moving average cross-overs, convergences, and divergences.
Moving Average Convergence Divergence MACD Formula and Calculation
The MACD is formed from the following:
- MACD line: 12-period exponential moving average minus the 26-period exponential moving average.
- Signal line: 9-period EMA of the MACD.
- Histogram: MACD minus the MACD signal line.
The MACD gets its name from the divergence and convergence of moving averages. When the MAs move towards each other, this is a convergence, then the MAs move away from each other, this is a divergence.
The default settings for the MACD are “12, 26, 9,” which refers to how many bars the moving averages cover. The 12 represents the bars for the faster-moving average, the 26 is for the slower-moving average, while the 9 is the difference between the two moving averages as the histogram.
Moving Average Convergence Divergence (MACD) Signals
There are numerous signals generated by the MACD, namely convergences, divergences, and crossovers. These signals come in either bullish or bearish varieties.
The most common kind of signals generated by the MACD are crossovers. A bullish crossover occurs when the MACD crosses above the signal line, while a bearish variety occurs when the MACD crosses below the signal line.
The next most common signals generated by the MACD are centerline crossovers. A bullish centerline crossover occurs when the MACD crosses above the zero line, while a bearish crossover is when the MACD crosses below the centerline.
Crossovers can last weeks, days, and even months in some cases.
Divergences are another common signal and occur when price diverges from the price of a security in question. Just as with crossovers, you’ll also notice that the MACD has both bullish and bearish varieties.
A bullish divergence is when the MACD diverges from price action. In other words, an index would make a lower low while the MACD makes a higher low. As the MACD is measuring momentum, this could foreshadow a reversal to the upside of the given index or security.
A bearish divergence, on the other hand, forms near market tops. A security could form a higher high while the MACD forms a lower high.
Special attention should be taken when trading divergences. It’s not uncommon to see divergences in strong up and downtrends, and therefore, might not produce reliable signals.
Moving Average Convergence Divergence MACD Histrogram
The MACD histogram is another tool that can help you visualize the momentum of a security. The histogram will change color and direction as the moving averages converge and diverge. The further apart the moving averages are, the bigger difference the MACD histogram will show and vice-versa.
Moving Average Convergence Divergence in Forex
The MACD can be combined in forex strategy as a momentum indicator to uncover entry and exit opportunities. It’s advisable to combine the indicator with other tools such as Bollinger Bands, pivot points, as well as volume indicators such as the accumulation distribution line.