The Moving Average Convergence Divergence, MACD in short, is an indicator that helps to identify the trend and its strength, and the likelihood of the trend reversal. It has three components. The MACD line, the signal line and the MACD histogram. In spoken language, it is pronounced as MAKDI, instead of spelling each letter separately.
The first component: the MACD line
This line represents the distance between two Exponential Moving Averages, one with the period of 12 and the other 26. Whenever the MACD reaches the zero level, there is no difference between EMAs.
When the gap between two EMAs occurs, the MACD line runs away from the zero line. The bigger the difference, the further the MACD line goes.
The second component: the signal line
This is nothing more like a smooth MACD. With default settings, it is calculated from the 9 previous periods’ average value.
The signal line is a slow version of the MACD line. It is a slow-motion moving average that is periodically intersected by the faster MACD.
The third component: the MACD histogram
The MACD histogram illustrates how far are the MACD and the signal lines from each other. When they cross, there are no visible bars. Otherwise, the bars are getting longer when the MACD line and its average (the signal line) increase the distance between. The other thing is that the bars change polarity. There will form above the zero level when the price is going up, and they will form below zero when the price falls.
The configuration of the MACD indicator
To set the MACD indicator up you have to click on the indicators feature and scroll the list down. The MACD will be among oscillators. By clicking the pen icon in the indicator’s window you can adjust its settings. You can modify the colour and the thickness of all three oscillator’s components. Moreover, there is an option to change the period of the MACD line and the signal line.
The general interpretation
The basic rule is to observe two lines of the indicator and the points where they cross each other. When the signal line cuts the MACD line on the way up, it suggests the prices will increase. In the opposite situation, when the signal line cuts the MACD line on the way down, you can expect the prices to fall.
This is the general interpretation of the MACD indicator. It is simple, yet efficient. And this is its greatest advantage. You may be also interested in reading the guide about strategy which combines MACD, EMA and Parabolic SAR.
I recommend trading with the MACD on the free Olymp Trade practice account. Once you get hold of it, you can move to the real account. Do not hesitate to share your experience with us. You will find the comments section below.
Wish you good luck!
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