There are several forms of representation of the MACD. Due to its popularity, I will dedicate the article to the representation of the MACD on the Metatrader platform with a shorter explanation at the end about the most common representation on other platforms. The convergence/divergence of moving averages (Moving Average Convergence Divergence, MACD) is one of the best-known indicators used in technical analysis. It is used both to signal the trend and to show the momentum of the movement. Simply put, the MACD is an oscillator-type indicator that shows the distance between a fast exponential moving average (EMA) and a slow exponential moving average. Or what is the same, it shows the convergence/divergence of two exponential moving averages. Calculation: MACD = EMA (fast) – EMA (slow)
It is represented in the form of a histogram that is distributed on a central line at the value 0 and a line called the signal line. In the most used configuration, and which comes by default in all trading platforms, the fast EMA is 12 periods, the slow one is 26 periods and 9 periods for the calculation of the signal line.
The value of the histogram is the result of the difference of the value of the fast EMA minus the value of the slow EMA, in other words, the value of the divergence of the two moving averages. In this way we can deduce the meaning of the MACD histogram:
- MACD above 0 : The histogram has positive values and indicates that the fast EMA is higher than the slow EMA, if we remember from the moving average lesson, this indicates an uptrend. Let’s assume a MACD value of 0.0023: this will mean that between the fast and slow EMA there is a difference of 23 points, for example, if we have EURUSD with fast EMA at 1.2523 and slow EMA at 1.2500.
We can also deduce that if the histogram is positive and growing, the uptrend is in process since the difference in both EMAs is increasing. On the contrary, if the histogram is positive but decreasing, the uptrend may be receding as the difference between the fast and slow EMA is decreasing.
- MACD below 0 : If the fast EMA is lower than the slow EMA, by making the difference the result will take negative values leaving the MACD below the 0 level. As you will remember from the moving average lesson, the fast EMA below the slow EMA indicates a trend bass player.
In the same way as before, if the histogram is below 0 and it is increasingly negative, it will indicate that the downtrend is in process since the difference between both EMAs is increasing.
- Crossover of the MACD level 0 : If the MACD crosses the level 0 from the bottom up, it tells us that the fast EMA has gone from being lower than the slow EMA to being higher, that is, it indicates the crossing of the moving averages and the change of trend from bearish to bullish. Similarly, if the MACD crosses the 0 level from top to bottom, it indicates the crossing of the fast EMA with the slow EMA from top to bottom, this is the change in trend from upward to downward trend.
In the following image we can see how the histogram behaves. For a better interpretation the corresponding EMAs have been added on the chart.
With what has been said so far, you can think, and why do I want the MACD if the crossing of two EMAs and the distance between them I can see it without the need for a new indicator? For the answer I present the other component of the MACD, the signal line. This line is an exponential moving average calculated on the difference of the moving numbers, that is, a moving average of the histogram value. Like any moving average, it shows us the movement of the histogram in a smoother way and together with the histogram we have one of the common ways of taking MACD signals: the crossing of the histogram and the signal line. Another commonly used MACD-generated signals is MACD / Price divergence. Let’s look at both types of signals in more detail.
Crossing the signal line with MACD
The signal line, as we said, is a moving average, by default of 9 periods, over the MACD. The crossing of the signal line with the histogram informs us of a possible change in trend in a faster way than the crossing of the EMAs.
We will have two possibilities:
- The crossover occurs in that direction in which the histogram becomes larger than the signal line. This crossing would indicate an upward signal. To catch a wider route, the ideal is to take this signal when it occurs below line 0.
- The crossover occurs in that direction in which the histogram becomes smaller than the signal line. This crossing gives us a possible sell signal. In the same way as the previous case, to catch a greater number of points, the ideal would be to take this signal when it occurs at the top of line 0.
In the following image we can an ideal scenario with the signals of crossing the signal line with MACD:
The divergence between the MACD and the price on the chart is a fairly reliable and very commonly used signal.
MACD bullish divergence: It will give us a buy signal and is characterized when two minimums appear in the price, the second lower than the first, while the two corresponding minimums of the MACD go upwards, that is, the second minimum that is seen in MACD it is higher than the first. Although the price of the currency pair continues to decline, visible in that the lows are getting lower and lower, the fact that the corresponding lows of the MACD are increasing indicates that the momentum is approaching the uptrend. And since a picture is worth a thousand words, here’s an image with a bullish divergence: (momentum) is changing and
Bearish MACD divergence: Analogous to bullish divergence, MACD / Price divergence will give us a sell signal. This signal appears when two highs are observed in the price of the currency pair, the second higher than the first, while the two corresponding highs in the MACD go in a decreasing direction (second lower than the first).