MACD (Moving Average Convergence Divergence)
MACD is a momentum indicator that compares two moving averages of price to show changes in trend direction and strength.
MACD stands for Moving Average Convergence Divergence. It is a popular indicator on forex, gold and stock charts. It shows how far apart a faster and a slower moving average are, which helps traders see momentum.
How it is built
With the common default settings (12, 26, 9):
- MACD line = 12-period EMA minus 26-period EMA.
- Signal line = 9-period EMA of the MACD line.
- Histogram = MACD line minus Signal line, drawn as bars.
Small example
On an EURUSD chart, suppose the 12-period EMA is 1.1050 and the 26-period EMA is 1.1030. The MACD line is 1.1050 − 1.1030 = 0.0020, which is 20 pips. If the Signal line is 0.0015, the histogram is 0.0020 − 0.0015 = 0.0005.
How people read it
- The MACD line is above zero when the faster EMA is above the slower one, and below zero when it is under.
- When the MACD line crosses the Signal line, momentum may be changing.
- Bars in the histogram that shrink suggest momentum is weakening.
Common beginner mistake
MACD is built from past prices, so it lags. In a sideways market it often crosses back and forth and gives many false signals. Beginners sometimes treat every crossover as a sure signal. It is better used together with price action, support and resistance, and risk tools such as a Stop Loss.