The moving average convergence divergence (MACD) indicator (pronounced “mac-dee”) is one of the most popular indicators for traders. It offers insight into the momentum of price movements of several investment assets and can signal when a trend is starting, ending, or continuing.
Here is a closer look at how to read MACD graphs and methods for using this indicator for technical analysis.
Here is a closer look at how to read MACD graphs and methods for using this indicator for technical analysis.
What is the MACD indicator?
The first step in understanding MACD indicators graphs is learning where the data comes from and what it means.
The MACD indicator is a separate graph that usually appears under the price chart for your chosen market. It lines up with the chart so that the data from the MACD corresponds with the price action for the same timeframe.
Calculating the MACD involves using the exponential moving averages (EMAs). EMAs are weighted averages that favour the most recent data, which makes them slightly more sensitive to current market conditions than regular moving averages.
The MACD indicator is a separate graph that usually appears under the price chart for your chosen market. It lines up with the chart so that the data from the MACD corresponds with the price action for the same timeframe.
Calculating the MACD involves using the exponential moving averages (EMAs). EMAs are weighted averages that favour the most recent data, which makes them slightly more sensitive to current market conditions than regular moving averages.
The MACD line is the 26-period EMA minus the 12-period EMA. You also need to understand the signal line to know how to read MACD graphs. The signal line is the 9-period EMA of the MACD line (not the price chart). Some traders look for when the MACD line crosses over the signal line. Other strategies focus on the distance between the lines. You can add a histogram to the MACD indicator to highlight this variable.
Finally, some traders may look at the position of the lines in relation to the zero line that cuts through the middle of the graph.
While 26, 12, and 9 are the default settings for MACD charts, trading platforms like MetaTrader 4 allow you to alter these settings to increase or decrease the indicator’s sensitivity.
Finally, some traders may look at the position of the lines in relation to the zero line that cuts through the middle of the graph.
While 26, 12, and 9 are the default settings for MACD charts, trading platforms like MetaTrader 4 allow you to alter these settings to increase or decrease the indicator’s sensitivity.
How to read MACD graphs
One of the reasons that the MACD is so popular is that it produces more than one signal. Traders look for three different signals depending on their overall strategy:
Crossovers
Histograms
Divergence
Let’s understand how to read MACD charts for these three approaches.
MACD crossovers
Crossovers occur when the MACD line crosses over the signal line, which usually signals that the trend is changing and gaining enough momentum to continue its upward trend. This is typically an entry signal for traders who want to open a long position in the market. You can also use a crossover for opening a short position. This setup will occur when the signal line moves above the MACD line.
Some strategies use the zero line, also known as the baseline, to confirm the validity of the crossover. Traders may only think a buy signal is useful when the MACD line crosses over when it is below or at the zero line. Likewise, they may only consider opening a short position if the signal line crosses over when it is above the zero line.
Below is an example of a MACD crossover.
Some strategies use the zero line, also known as the baseline, to confirm the validity of the crossover. Traders may only think a buy signal is useful when the MACD line crosses over when it is below or at the zero line. Likewise, they may only consider opening a short position if the signal line crosses over when it is above the zero line.
Below is an example of a MACD crossover.
As you can see, when the MACD falls below the signal line (left and right ovals), it is considered a bearish signal, indicating it may be time to sell. When the MACD rises above the signal line (centre oval), this indicates a bullish signal, suggesting that the currency pair’s price will likely reach a low and will see some upward momentum.
MACD histograms
The histogram measures the difference between the signal and MACD lines. When the histogram crosses the zero line, it means the two lines are directly on top of one another.
Some traders may see the histogram trend as it approaches the zero line and receive an early warning about the coming crossover. Some may even use the upward or downward histogram trend as a signal to get into the market before the crossover occurs.
Some traders may see the histogram trend as it approaches the zero line and receive an early warning about the coming crossover. Some may even use the upward or downward histogram trend as a signal to get into the market before the crossover occurs.
MACD divergence
When the MACD has a high or low that does not correspond to the high or low of the price, it is called a divergence. In most instances, you will see the two move in the same direction. A bearish divergence has formed in cases where the MACD forms a series of two falling highs corresponding with two rising price high. Bullish divergence occurs when the MACD forms two rising lows corresponding to two falling lows in the price.
Sometimes, the MACD moves ahead of the market. For instance, the market continues to move upward but loses momentum as it does so. The MACD may sense this and begin moving in a downward direction. The important factor here is the direction of the MACD line, not the crossover.
Both price charts and MACD graphs move in waves. Because of this trait, it can be difficult to see divergence. However, you can add trend lines connecting the highest or lowest lows of each wave in the price and indicator charts.
You can look at these lines rather than trying to guess the direction by glancing at the chart.
MetaTrader 4 allows you to draw trend lines manually directly on your charts using a cursor tool.
Both price charts and MACD graphs move in waves. Because of this trait, it can be difficult to see divergence. However, you can add trend lines connecting the highest or lowest lows of each wave in the price and indicator charts.
You can look at these lines rather than trying to guess the direction by glancing at the chart.
MetaTrader 4 allows you to draw trend lines manually directly on your charts using a cursor tool.
How to read MACD with other indicators
Experienced traders rarely use one indicator. For example, if you trade forex, you may use MACD and Relative Strength Index (RSI) indicators combined with candlestick patterns and Bollinger Bands. This allows you to confirm whether the market is moving in the expected direction, helping you make more strategic trading decisions.
For example, if you notice a MACD crossover, you may look to a candlestick chart to see if you can find any reversal signals. You can also look at the RSI.
For example, if you notice a MACD crossover, you may look to a candlestick chart to see if you can find any reversal signals. You can also look at the RSI.
Markets to trade with the MACD indicator
The MACD works in any market where you can use technical analysis, including:
A broker for your MACD indicator strategies
With rapid trades, over 10+ liquidity providers, 24/7 customer support and transparent pricing, TMGM is the top broker choice for novice and seasoned traders alike.
Learn more about our trading platform options by contacting us today.
Frequently Asked Questions
The MACD is an excellent indicator for day trading, as you can adjust time periods to increase sensitivity for trading in short timeframes.
The MACD is regarded as an accurate indicator because it uses multiple variables and offers three different trading signals. However, it’s best to combine MACD with other indicators and chart patterns to confirm MACD the market’s movements.
The RSI, Bollinger Bands, and Stochastic Oscillators work well alongside the MACD.
A golden cross is when a short-term moving average crosses over a longer-term average. In the MACD chart, this is when the MACD line crosses over the signal line and is considered a sign of a bullish market.