Trading With the MACD Indicator

MACD or Moving Average Convergence Divergence, might sound like a mouthful. but really.. it’s one of the simplest indicators available to traders to help us spot potential trend reversals.

There are three major parts to the MACD

• The MACD Line

• MACD Signal Line

• MACD Histogram

What is the MACD Indidcator?

The MACD Indicator is a momentum indicator that shows us the relationship between two moving averages, which also helps to give us an indication of trend.

Not not only that, it was designed to help reveal changes in strength, momemtum, direction and the duration of (at the time) a stocks price.

While the MACD is a very handy tool for traders, it does have it drawbacks. Since the MACD is based on moving averages, it is essentially, a lagging indicator (means it doesn’t give us immediate price information).

What does Divergence & Convergence Mean?

When you hear about Divergence, it simply means that the MACD and Signal lines are drifting apart, or getting further away from eachother.

While Convergence means that the MACD and Signal line are coming together and when both of these events occur on the MACD… TAKE NOTICE

Parts of the MACD Indicator

Like we mentioned above, there are three major parts to the MACD indicator.

THE MACD LINE

• The MACD is a twelve (12) period exponential moving average (EMA) minus the 26-period EMA. The 12 represents the previous 12 bars of the faster moving average (MACD) and the 26 represents the previous 26 bars of the slower moving average (Signal Line)

THE MACD SIGNAL LINE

• Is a 9 period EMA of the MACD and represents the 9 bars of the difference between those two moving averages called the histogram.

MACD HISTOGRAM

• The MACD minus the signal line, which plots the bars you see, show us the difference between the two moving averages. You will notice on your charts that as the MACD and Signal line move apart, the histogram bars get bigger.

How to Trade Using the MACD

When trading using the MACD, we look for what’s called a signal line crossover. This occurs when the MACD & signal lines “cross”. These bullish or bearish crossovers give us information on potential buys and sells.