MACD Indicator Explained How Does It Work? Definition & Examples

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts.

Centerline crossovers are the next most common MACD signals. A bullish centerline crossover occurs when the MACD line moves above the zero line to turn positive. This happens when the 12-day EMA of the underlying security moves above the 26-day EMA. A bearish centerline crossover occurs when the MACD moves below the zero line to turn negative. This happens when the 12-day EMA moves below the 26-day EMA. The MACD line oscillates above and below the zero line, which is also known as the centerline.

MACD Formula

When the MACD line crosses up on the Signal line, that suggests bullish momentum. When the MACD line crosses down on the Signal line, that suggests bearish momentum. The more deviated the MACD and Signal lines become from the Zero line, the more likely a reversal is to occur. As is visualized in the image above, the ‘Signal’ line and the ‘MACD’ line appear as moving averages that oscillate mostly in tandem with price action. When price is increasing, the MACD line is generally going to be positioned above the Signal line and the histogram will be green. The rate at which price increases is expressed via the length of the histogram bars.

Alternatively, when MACD is decreasing together with the histogram value, it signifies that the price is most likely dropping and the asset should be sold. Update it to the latest version or try another one for a safer, more comfortable and productive trading experience. Stay on top of upcoming market-moving events with our customisable economic calendar.

Best MACD trading strategies

This method should be used carefully, as the delayed nature means that fast, choppy markets would often see the signals issued too late. However, as a tool for providing reversal signals of long sweeping moves, this can be very useful.

For example, a bullish divergence happens when the MACD forms two rising lows that align with two falling lows on the asset’s price. Conversely, a bearish divergence occurs when the MACD forms two falling highs that line up with two rising highs in the price. Bullish divergences tend to lead to price reversals, possibly signaling a change in the trend. The signal line is How to Use the MACD Indicator the 9-day EMA of the MACD line itself. In oversold conditions, RSI suggests that traders may have overreacted and have now created value by depressing price and demand for a currency pair. Of retail investor accounts lose money when trading CFDs with this provider. Close the position as soon as MACD crosses the signal line in the direction opposite to the entry point.

How to Trade the MACD Indicator

If the MACD were to be trading above the zero line, it would confirm an uptrend, below this and the indicator would be used to confirm https://www.bigshotrading.info/ a downtrend. MACD is based on EMAs , which means that it can react very quickly to changes of direction in the current price move.

Moreover, this indicator might signal a potential reversal, but it doesn’t tell traders when that reversal may happen. Investors should remember the MACD only signalspossiblereversals, not guaranteed forecasts. The Moving Average and Convergence Divergence indicator is a lagging indicator used to follow trends, developed by Gerald Appel. It contains two exponential moving averages and a histogram.

Zero line crossovers

If you open MetaTrader, you’ll see that both indicators are in the Oscillators tab. On the contrary, the RSI indicator is calculated by measuring the speed and average price gains/losses. 8, 17 and 9 are just as popular as the default combination.

• On the other hand, weak signals offered by MACD can sometimes be clarified by extending the timelines of this indicator.
• A bullish divergence forms when a security records a lower low and the MACD forms a higher low.
• It’s one of the widely-used indicators that has many advantages.
• Sophisticated traders create their own patterns, based on their individual experiences.
• I use the 20 and 50 period moving average and I know the MACD is dependent on the moving average.
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