MACD BASICS (Moving Average Convergence Divergence)

Structure of MACD

The MACD indicator displays 3 elements: MACD line, signal line, and histogram. For example, taking the default parameter (12,26,9) then:

  • The MACD line (also known as the fast MACD line) is the moving average of MA12 and MA26.
  • The signal line (or slow MACD line) is the MA9 line of the MACD line.
  • The histogram is the difference between these two lines.

Traditional MACD usage

MACD crossover - Cross over with the MACD line

The first traditional use of MACD is to use signals that intersect two lines. Specifically, when the fast MACD line crosses below the slow MACD line, it signals the price to turn down and on the contrary, it signals the possibility that the price will turn up.

With this simple usage, traders will face a lot of noise, and without signal filtering skills, the trader's trading results will be very bad.

The advice with this usage is that we have to identify a clear trend then wait for signals and only enter the trend.

MACD divergence

The next most common use for MACD is signal divergence, with which the MACD acts as a leading indicator. Essentially: a bullish divergence occurs when the price establishes a new low (a new low) but not in the MACD indicator.

As in this example, traders wait to buy when the bullish divergence has formed and the price breaks the red resistance line.

A bearish divergence occurs when the price establishes a new high (new high) but not on the MACD indicator.

When the bearish divergence appears, traders wait for the price to break the blue support line and enter an order.

Just like the crossover signal, the divergence signal also has many false signals. As in the example below, 4 consecutive bearish divergences can be observed, but the price keeps going up because the uptrend is still very strong.