MACD
Moving Average Convergence Divergence (MACD) combines trend-following and momentum in one indicator. It's powerful for timing entries and exits.
MACD shows the relationship between two moving averages. When they converge/diverge, it reveals changes in trend strength.
What is MACD?
MACD has three components:
| Component | Calculation | What It Shows |
|---|---|---|
| MACD Line | 12 EMA - 26 EMA | Speed of trend |
| Signal Line | 9-period EMA of MACD Line | Smoothed MACD |
| Histogram | MACD Line - Signal Line | Gap between the two |
Reading the MACD
MACD Line
- Above zero: Short-term trend stronger than long-term (bullish)
- Below zero: Short-term trend weaker than long-term (bearish)
- Rising: Momentum increasing
- Falling: Momentum decreasing
Signal Line
Acts as a trigger for buy/sell signals:
- MACD crossing above Signal: Bullish
- MACD crossing below Signal: Bearish
Histogram
Visualizes the difference between MACD and Signal:
- Growing histogram: Momentum accelerating
- Shrinking histogram: Momentum slowing
- Color change: Potential crossover coming
Watch the histogram shrinking before crossovers happen. It gives early warning of potential trend shifts.
MACD Signals
Bullish Crossover
MACD line crosses above Signal line:
- Momentum shifting upward
- Potential buy signal
- More reliable when below zero line
Bearish Crossover
MACD line crosses below Signal line:
- Momentum shifting downward
- Potential sell signal
- More reliable when above zero line
Zero Line Cross
MACD line crossing zero:
- Above zero: 12 EMA above 26 EMA (uptrend)
- Below zero: 12 EMA below 26 EMA (downtrend)
Zero line crosses are lagging but significant. They confirm trend direction changes.
MACD Divergence
Like RSI, divergence is powerful:
Bullish Divergence:
- Price makes lower low
- MACD makes higher low
- Potential bottom
Bearish Divergence:
- Price makes higher high
- MACD makes lower high
- Potential top
Best MACD Settings
Default (12, 26, 9) works for most purposes:
- Some traders use (8, 17, 9) for faster signals
- Longer periods (19, 39, 9) for less noise
Stick with defaults until you understand the indicator well.
MACD Limitations
| Limitation | Explanation |
|---|---|
| No absolute levels | Unlike RSI, no overbought/oversold |
| Best in trends | Struggles in consolidation |
Combining MACD with Other Tools
MACD works best when combined:
| Combine With | Purpose |
|---|---|
| Price patterns | Entry on pattern + MACD confirmation |
Practical Example
Strong buy signal:
- Price at support level
- MACD histogram shrinking
- Bullish MACD crossover
- Price confirms with bullish candle
This alignment increases probability of success.
Key Takeaways
- MACD shows the relationship between 12 and 26 EMAs
- Crossovers of MACD and Signal lines generate signals
- Zero line crosses confirm trend direction
- Divergence warns of potential reversals
- Best used with other analysis tools
Next: How do you combine indicators effectively? Let's discuss combining indicators.
Sources & Disclaimer
- Standard Market Conventions for Technical Analysis
- BSE/NSE Charting and Analysis Guides
Note: Any benchmarks (e.g., "Good ROE is > 20%", or specific P/E ranges) are simplified industry heuristics for educational purposes. True evaluation depends on specific industry context, market cycles, and individual company circumstances.