Moving Average Convergence Divergence (MACD) is a technical analysis momentum indicator used by traders /investors to identify the trend direction of securities.

MACD - Moving Average Convergence Divergence Content Image

The MACD indicator on the price chart usually has below parts: 

  • MACD line
  • Signal Line
  • Base Line
  • Histogram.

Some key things to remember:

  1. The MACD line represents the difference between the 26day exponential moving average ( EMA) and 12day  EMA.
  2. The signal line represents nine-day EMA.
  3. The baseline is at Zero level i.e horizontal axis.
  4. Histogram plots the distance between MACD and Signal line so histogram’s size changes as both lines converge and diverge. 
  5. MACD Line (red)  and Signal Line (blue) oscillate without boundaries around the baseline which is at zero. 
  6. If MACD is above the signal line then the histogram will be above the baseline and vice-versa.

How to derive Trading sentiments from MACD? 
Traders derive trading signals based on when MACD and Signal lines crossover, diverge, fall/ rise. 

Sentiment Vs Crossover Mapping

Bullish Sentiment 
  • The MACD line is crossing above the Zero i.e baseline 
  • MACD line is crossing from below to above the signal line.
Bearish Sentiment
  • The MACD line is crossing from above to below Zero.
  • The MACD line is crossing from above to below the signal line.

Sentiment Vs Divergence Mapping
Divergence happens when there is a difference between the MACD and the price action of the security on the chart. This is considered a very strong signal. 

Bullish Sentiment  Price of the security makes lower lows and MACD line makes higher lows.
Bearish Sentiment Price of the security makes higher lows and MACD line makes lower lows

Practice MACD – Beginner

Practice MACD – Intermediate

Practice MACD – Advanced

Practice MACD – Expert