About MACD

MACD is one of the most frequently used indicators in technical analysis. It was created by Gerald Appel in the 1960s and is calculated as the difference between two exponential moving averages (EMA) applied to the close price:

MACD = Fast Exponential Moving Average - Slow Exponential Moving Average

12- and 26-bar period settings traditionally are the most popular settings for fast and slow EMAs, respectively. A signal line (or trigger line) is then formed by applying an exponential or simple moving average to the MACD line. The standard period for the Signal Line (MACD Signal) is 9 bars:

MACD Signal = MA applied to MACD

The difference between the MACD and the MACD signal line is MACD Histogram. This construction was created by Thomas Aspray in 1986.

MACD Histogram = MACD - MACD Signal Line.

How to Use MACD:

There are three common ways in technical analysis to interpret the MACD:

1.  Crossovers of the MACD and the MACD Signal Line - when the MACD falls below the signal line, it indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, it suggests that the price is likely to rise. Crossovers of MACD and the Signal Line are equivalent to the moments when the MACD Histogram crosses zero line.
2. Crossovers of the MACD and the zero line - A crossing of the MACD line up through zero is interpreted as bullish, or down through zero as bearish.
3.  Divergence of the price and the MACD - When the security price diverges from the MACD, it signals the end of the current trend.

Like other lagging (trend-following) indicators, the MACD may generate false signals when it is too late to open / close a trade. It is a good idea to use this indicator in conjunction with other leading (trend-predicting) technical indicators, including volume-based indicators. Leading technical indicators may permit the use of a tighter MACD setting.