MACD measures the strength or weakness of the price action of a stock or other asset, using the momentum of its moving averages. It displays short-term trend changes that may impact longer-term trends. This leading indicator may also alert traders to potential reversals in an existing trend and possibly the beginning of a new one.
A typical MACD graph includes two lines, commonly referred to as the Graph Line and the Signal Line:
• MACD graph line (MACDg) is the difference between two moving averages, typically a 12- day Exponential Moving Average (EMA) of daily closing prices and a 26-day Exponential Moving Average (EMA) of daily closing prices.
• MACD signal line (MACDs) is the moving average of the MACD Graph line and is typically calculated using a 9-day Exponential Moving Average (EMA) of the MACD Graph line.
Indicator signals: What traders look for
A few ways this indicator is used is to help identify short-term trend changes that may impact longer-term trends by looking for crossovers and/or convergences and divergences.
Crossovers (trend reversals)
The key to MACD is the interplay between the Graph Line and the Signal Line. A “Crossover” occurs whenever the Graph Line crosses the Signal Line either to the upside or the downside.
Convergence/divergence (trend strength/weakness)
- Convergence – A MACD convergence occurs when the Graph Line and the Signal Line move in the same direction and serves as confirmation of the current price trend.
- Divergence – A MACD divergence occurs when the Graph Line fails to confirm the current trend in price. This can serve as a warning sign of trend weakness and a potential impending reversal.
As with any technical analysis signal, it can be useful to wait for confirmation of a change in trend before taking action.
1. Bullish crossover signals (trend reversal)
During a downtrend, the MACD Graph line crosses above the Signal line and/or or moves from below zero to above zero, signaling a potentially bullish price reversal.
Some traders will consider a cross by the Graph Line above the Signal Line to be an early warning action signal. Other traders prefer to wait for the Graph Line to cross above zero as a bullish confirmation signal.
2. Bullish convergence (bullish trend strength)
Price and MACD Graph Line are both making higher highs in conjunction with a given trend, signaling that the bullish trend is potentially gaining strength to the upside.
3. Bullish divergence (bearish trend is weakening)
Price is making lower lows while MACD is making higher lows, signaling that the downtrend may potentially be losing strength.
Bearish indicator signals
1. Bearish crossover (trend reversal)
During an uptrend, the MACD Graph line crosses below the Signal line and/or or moves from above zero to below zero, signaling a potentially bearish price reversal.
Some traders will consider a cross by the Graph Line below the Signal Line to be an action early warning action signal. Other traders prefer to wait for the Graph Line to cross below zero as a bearish confirmation signal.
2. Bearish convergence: Bearish trend strength
Price and MACD are both making lower lows in conjunction with a given trend, signaling that the bearish trend is potentially gaining strength to the downside.
3. Bearish divergence (bullish trend is weakening)
Price is making higher highs while MACD is making lower highs, signaling that the uptrend is potentially losing strength.
MACD is an extremely flexible technical analysis tool that can be used in a variety of ways. Crossovers and convergences can highlight opportunities to buy into early strength and/or sell into early weakness. Bullish and bearish divergences may allow you to identify when momentum is waning for a particular move in a way that may not be obvious when looking only at price action.