CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Moving Average Convergence Divergence (MACD)

Related subjects:
Reading time: 2 minute(s)

The Moving Average Convergence Divergence (MACD) is an indicator that shows the difference between two exponential moving averages. It is widely used by technical analysts to spot price trends and new trade opportunities, and in this article, you can learn how to use MACD in your trading.

What Is Moving Average Convergence Divergence (MACD)?

The MACD indicator shows the difference between two exponential moving averages. It is calculated by subtracting the 26 period exponential moving average (EMA) from the 12 period EMA. Additionally, a 9-period EMA of the MACD itself is formed as a signal line. The MACD is widely used by technical analysts to spot price trends and new trade opportunities.

How the MACD Indicator Works

There are various ways of how the MACD indicator may be utilised, but one of the simplest ones is based on the crossovers between the MACD line (orange line) and the signal line (red line).

Buy signals are generated when the MACD line (orange) crosses over the signal line (red) from the bottom, and sell signals are generated when the MACD line crosses over the signal line from the top.

Moving Average Convergence Divergence.png

Source: xStation
Please be aware that the presented data refers to the past performance data and as such is not a reliable indicator of future performance.

In the below screen, two examples of buy signals and three signals of sell signals were generated by the indicator.

Similarly to other indicators, oscillators and various technical analysis tools, the MACD tends to generate false signals. In order to decrease the probability of generating false sell signals, the MACD may be used with other tools. When all the used technical tools indicate the same direction for the market, then this increases the probability of the success of the trade.

MACD Indicator.png

Source: xStation
Please be aware that the presented data refers to the past performance data and as such is not a reliable indicator of future performance.

Key Points to Keep in Mind When Reading the Indicator

MACD crossing above zero is considered bullish, while crossing below zero is bearish. Secondly, when MACD turns up from below zero it is considered bullish. When it turns down from above zero it is considered bearish.

When the MACD line crosses from below to above the signal line, the indicator is considered bullish. The further below the zero line the stronger the signal.

When the MACD line crosses from above to below the signal line, the indicator is considered bearish. The further above the zero line the stronger the signal.

Key MACD Strategy Takeaways

  • MACD is a popular form of Technical Analysis where traders utilise differences between two exponential moving averages to spot new trading opportunities
  • Crossovers are one of the simplest strategies for employing MACD and pinpoints new buy or sell signals when the MACD line crosses over the signal line in a chart. This strategy is called the MACD Crossover Strategy.
  • The MACD Zero Crossover strategy involves picking buy trades when the MACD crosses from below to above the zero line. Equally it involves taking sell trades when the MACD crosses from above the zero line to below it.

FAQ

When the MACD line crosses from below to above the signal line, the indicator is considered bullish. The further below the zero line the stronger the signal. When the MACD line crosses from above to below the signal line, the indicator is considered bearish. The further above the zero line the stronger the signal.

On the chart, the MACD is displayed with three accompanying numbers (coordinates):

  • The first indicates the number of periods used for the calculation of the shorter (faster) EMA.
  • The second reveals the number for the longer (slower) EMA.
  • The third coordinate is the difference between both.

A moving average (MA) is a stock indicator commonly used in technical analysis, used to help smooth out price data by creating a constantly updated average price. A rising moving average indicates that the security is in an uptrend, while a declining moving average indicates a downtrend.

Convergence means that two moving averages are coming together, while divergence means that they're moving away from each other. The MACD indicator is made up of three components:

  • The MACD line, which measures the distance between two moving averages
  • The signal line, which identifies changes in price momentum and acts as a trigger for buy and sell signals
  • The histogram, which represents the difference between the MACD and the signal line

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

Xtb logo

Join over 935 000 investors from around the world