MACD (moving average convergence/divergence) is a technical analysis indicator used to spot changes in the strength, direction, momentum, and duration of a trend in an asset's price.
The MACD "oscillator" or "indicator" is a collection of three signals, calculated from historical price data, most often the closing price. These three signal lines are: the MACD line, the signal line, and the difference (or divergence). The term "MACD" may be used to refer to the indicator as a whole, or specifically to the MACD line itself. The first line, called the "MACD line", equals the difference between a "fast" (short period) exponential moving average (EMA), and a "slow" (longer period) EMA. The MACD line is charted over time, along with an EMA of the MACD line, termed the "signal line" or "average line". The difference (or divergence) between the MACD line and the signal line is shown as a bar graph called the "histogram" time series.
A fast EMA responds more quickly than a slow EMA to recent changes in an asset's price. By comparing EMAs of different periods, the MACD line can indicate changes in the trend of an asset price. By comparing that difference to an average, an analyst can detect subtle shifts in the assets trend. Since the MACD is based on moving averages, it is inherently a lagging indicator. However, the MACD does not lag as much as a basic moving average crossing indicator, since the signal cross can be anticipated by noting the convergence far in advance of the actual crossing. As a metric of price trends, the MACD is less useful for assets that are not trending (range trading) or are trading with erratic price action.
MACD Trading Signals
Traders tend to look for three signals from MACD which are:-
1. The MACD line crosses the signal line
2. The MACD line crosses the zero line - some call this the 'waterline'
3. There is a divergence between MACD and the price of the asset or between the histogram and the price of the asset
MACD / Signal Crossover
Monthly MACD Analysis on GBPUSD - 12/16 (75%) Crossover Signals resulted in a positive outcome
Video discussing MACD & Signal Entry signals on long term GBPUSD monthly chart
Signal–line crossovers are the primary signals generated by MACD. The standard technique is to buy when the MACD line crosses up through the signal line, or sell when it crosses down through the signal line.
The upwards cross is called a bullish crossover and the downwards cross a bearish crossover. Respectively, they can indicate that the trend in the asset is about to accelerate in the direction of the crossover.
The histogram shows when a crossing occurs. Since the histogram is the difference between the MACD line and the signal line, when they cross there is no difference between them. The histogram can also help in visualizing when the two lines are approaching a crossover. Though it may show a difference, the changing size of the difference can indicate the acceleration of a trend. A narrowing histogram suggests a crossover may be approaching, and a widening histogram suggests that an ongoing trend is likely to get even stronger.
A crossing of the MACD line through zero happens when there is no difference between the fast and slow EMAs. A move from positive to negative is bearish and from negative to positive, bullish. Zero crossovers provide evidence of a change in the direction of a trend but less confirmation of its momentum than a signal line crossover.
The MACD is only as useful as the context in which it is applied. An analyst might apply the MACD to a weekly chart before looking at a daily chart, in order to avoid making short term trades against the direction of the intermediate trend. Analysts will also vary the parameters of the MACD to track trends of varying duration. One popular short-term set-up, for example, is the (5,35,5).
Like any forecasting indicator, the MACD can generate false signals. A false positive, for example, would be a bullish crossover followed by a sudden decline in an asset price. A false negative would be a situation where there was no bullish crossover, yet the asset price accelerated suddenly upwards.
The out of the box MetaTrader MACD indicators do not have a histogram showing the differential between the main and signal levels. The Histogram is a useful tool for identifying potential changes in trend.
The indicator can provide the trader with alerts when the following conditions are met:-
MACD has momentarily crossed above/below the signal line
MACD has physically crossed above/below the signal line
MACD has momentarily crossed over the zero (waterline) line
MACD has physically crossed over the zero (waterline) line
Traders can control the maximum number of alerts and the alert interval between each alert. Traders can set up on-screen pop up alerts, email Alerts and Push Notifications