How to Use the MACD Indicator

- August 18, 2021

M A C D
Moving Average Convergence Divergence.
This technical indicator is a tool that’s used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish.
After all, a top priority in trading is being able to find a trend, because that is where the most money is made.
With a MACD chart, you will usually see three numbers that are used for its settings.

The first is the number of periods that are used to calculate the faster-moving average.
The second is the number of periods that are used in the slower moving average.
And the third is the number of bars that are used to calculate the moving average of the difference between the faster and slower moving averages.

For example, if you were to see “12, 26, 9” as the MACD parameters (which is usually the default setting for most charting software), this is how you would interpret it:

The 12 represents a moving average of the previous 12 bars.
The 26 represents a moving average of the previous 26 bars.
The 9 represents a moving average of the difference between the two moving averages above.

There is a common misconception when it comes to the lines of the MACD.

There are two lines:

The “M A C D Line“
The “Signal Line“

The two lines that are drawn are NOT moving averages of the price.

The M A C D Line is the difference (or distance) between two moving averages. These two moving averages are usually exponential moving averages (E M A s).

When looking at the indicator, the M A C D Line is considered the “faster” moving average.

In our example above, the M A C D Line is the difference between the 12 and 26-period moving averages.

The Signal Line is the moving average of the M A C D Line.

When looking at the indicator, the Signal Line is considered the “slower” moving average.

The slower moving average plots the average of the previous M A C D Line. Once again, from our example above, this would be a 9-period moving average.

Most charts use a 9-period exponential moving average (EMA) by default.

This means that we are taking the average of the last 9 periods of the “faster” M A C D Line and plotting it as our “slower” moving average.

The purpose of the Signal Line is to smooth out the sensitivity of the

M A C D Line.

The Histogram simply plots the difference between the MACD Line and Signal Line.

It is a graphical representation of the distance between the two lines.

It may sometimes give you an early sign that a crossover is about to happen.

If you look at our original chart, you can see that, as the two moving averages (MACD Line and Signal Line) separate, the histogram gets bigger.

This is called a MACD divergence because the faster moving average (MACD Line) is “diverging” or moving away from the slower moving average (Signal Line).

As the moving averages get closer to each other, the histogram gets smaller. This is called convergence because the faster moving average (MACD Line) is “converging” or getting closer to the slower moving average (Signal Line).

And that, my friend, is how you get the name, Moving Average Convergence Divergence! Whew, we need to crack our knuckles after that one!

Ok, so now you know what MACD does. Now we’ll show you what MACD can do for YOU.

How to Trade Using MACD

Because there are two moving averages with different “speeds”, the faster one will obviously be quicker to react to price movement than the slower one.

When a new trend occurs, the faster line (MACD Line) will react first and eventually cross the slower line (Signal Line).

When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often indicates that a new trend has formed.