What Is MACD and How to Read the MACD Indicator

Key Takeaways

• Moving average convergence divergence (MACD) is a momentum and trend indicator based on the difference between the 12-period EMA and the 26-period EMA.
• MACD has four components: the MACD line, the signal line, the histogram and the zero line, displayed in a panel below the price chart.
• The default MACD settings of 12, 26 and 9 define the periods for the two EMAs and the signal line in the indicator.
• Traders interpret MACD through four signals: signal line crossovers, zero line crossovers, divergence and changes in the histogram.
• There is no single ideal MACD value because MACD is measured in price units, so a reading is meaningful only when compared with its own historical readings on the same chart.
• MACD has no fixed overbought or oversold level, while RSI moves on a fixed scale from 0 to 100, with standard levels at 70 and 30.
• MACD is a lagging indicator, so its signals appear after the price has moved and generate many false signals in a sideways market.

What Is MACD?

MACD is a momentum and trend indicator that tracks the difference between two exponential moving averages (EMAs) of price: the 12-period EMA and the 26-period EMA. An EMA is an average of recent closing prices that updates with each new price.

MACD shows trend and momentum in one indicator. Its position above or below zero indicates the trend, while the size of the gap between the two EMAs shows whether momentum is building or fading. Momentum is the strength behind a price rise or fall.

The name MACD describes how the two EMAs behave. Convergence means the 12-period EMA and the 26-period EMA are moving closer together, which usually happens as a trend loses momentum. Divergence means the two EMAs are moving apart, which usually happens as a trend gains momentum. The divergence in the name differs from the MACD divergence signal, where price and MACD move in different directions.

Gerald Appel created MACD in the late 1970s. MACD appears in a separate panel below the price chart and has no fixed upper or lower limit because its values increase or decrease with the price of the market being traded. Within that panel, MACD has four components.

The Four Components of the MACD Indicator

MACD has four components: the MACD line, the signal line, the histogram and the zero line. All four appear together in the MACD panel below the price chart. Each component answers a different question about momentum.

MACD Line

The MACD line is the 12-period EMA minus the 26-period EMA. It moves faster than the signal line because it reacts to price changes first. When the 12-period EMA is above the 26-period EMA, the MACD line is above the zero line, indicating bullish momentum, which means buyers are in control. When the 12-period EMA is below the 26-period EMA, the MACD line is below the zero line, indicating bearish momentum. MACD adds a slower line to smooth the MACD line.

MACD Signal Line

The signal line is a 9-period EMA of the MACD line, not of price. It moves more slowly and smooths out small fluctuations in the MACD line. Traders use the signal line as a trigger, since the point at which the MACD line crosses the signal line is one of the most closely watched MACD signals. The gap between the MACD line and the signal line is displayed as the histogram.

MACD Histogram

The MACD histogram is the MACD line minus the signal line, displayed as bars above or below the zero line. Bars above the zero line mean the MACD line is above the signal line, while bars below the zero line mean the MACD line is below the signal line. Taller bars mean the two lines are further apart.

The histogram does not show trading volume, even though its bars resemble a volume chart. Thomas Aspray is credited with adding the histogram to MACD in 1986. The histogram and the MACD line both move around the same reference line: the zero line.

MACD Zero Line

The MACD zero line is the middle line of the MACD panel. MACD reads zero when the 12-period EMA and the 26-period EMA are equal. When the MACD line is above the zero line, the 12-period EMA is above the 26-period EMA, indicating upward momentum. When the MACD line is below the zero line, the 12-period EMA is below the 26-period EMA, indicating downward momentum. A MACD line far from the zero line means there is a large gap between the two EMAs. All four MACD components come from one simple calculation.

How Is MACD Calculated?

MACD is calculated from closing prices in three steps: first the MACD line, then the signal line, and finally the histogram. Most charting platforms calculate MACD automatically, so traders only need to understand the logic behind each step.

MACD Formula

MACD line = 12-period EMA minus 26-period EMA

Signal line = 9-period EMA of the MACD line

Histogram = MACD line minus signal line

An EMA gives more weight to recent prices than to older prices, so it reacts faster than a simple moving average, which gives equal weight to every price. Each new EMA value is calculated using this formula.

EMA = closing price × multiplier + previous EMA × (1 minus multiplier)

Multiplier = 2 ÷ (number of periods + 1)

For the 12-period EMA, the multiplier is 2 ÷ 13, or approximately 0.1538. A multiplier of 0.1538 means each new closing price accounts for about 15% of the new 12-period EMA.

Step-by-Step MACD Calculation Example

1. Update the 12-period EMA with the latest closing price. Using illustrative figures, not actual market data, if the new closing price is $102 and the previous 12-period EMA was $100, the new 12-period EMA = 102 × 0.1538 + 100 × 0.8462, which is approximately $100.31.
2. Update the 26-period EMA in the same way, with a multiplier of 2 ÷ 27, or approximately 0.0741, so each new price carries less weight.
3. Subtract the 26-period EMA from the 12-period EMA to get the MACD line. If, on a later day, the 12-period EMA is $105 and the 26-period EMA is $100, the MACD line = $105 minus $100 = $5.
4. Calculate the 9-period EMA of the MACD line to get the signal line, which is $4 in this example.
5. Subtract the signal line from the MACD line to get the histogram, so the histogram = $5 minus $4 = $1.

The MACD value of $5 is expressed in the same units as price, so it cannot be compared with a $5 MACD reading in a different market or at a different price level. The 12, 26 and 9 used in the calculation are the default MACD settings.

What Do the MACD Settings 12, 26 and 9 Mean?

The MACD settings 12, 26 and 9 are the default numbers of periods in the three averages MACD uses: 12 periods for the first EMA, 26 periods for the second EMA and 9 periods for the signal line. A period is one bar on the price chart, so 12 periods means 12 days on a daily chart and 12 hours on a 1-hour chart.

The common explanation for these three numbers is that markets used to trade six days a week. In a six-day trading week, 12 periods covered about two weeks of trading, 26 periods about one month and 9 periods about a week and a half.

MACD settings can be changed. Shorter settings make MACD react faster but generate more false signals, while longer settings react more slowly and generate fewer signals. A setting of 5, 35 and 5 is a known faster setup for short-term trading. Trader Linda Bradford Raschke is known for an even faster 3, 10 and 16 version, based on simple moving averages rather than EMAs. Most traders retain 12, 26 and 9, the default settings on charting platforms. Once the settings are in place, interpreting MACD comes down to four signals.

How to Read the MACD Indicator

Traders interpret MACD through four signals: signal line crossovers, zero line crossovers, divergence and changes in the histogram. Each MACD signal indicates changing momentum but offers no guarantee. MACD signals tend to be more reliable when they point in the same direction as the main trend. Higher timeframes, where each bar on the price chart covers more time, generate fewer and steadier MACD signals.

MACD Signal Line Crossover

A bullish crossover occurs when the MACD line crosses above the signal line, suggesting that upward momentum is building. A bearish crossover occurs when the MACD line crosses below the signal line.

• A bullish crossover below the zero line is often interpreted as an early sign that a downtrend may be reversing, while one above the zero line is seen as a sign of continuing upward momentum.
• A bearish crossover above the zero line is often interpreted as an early sign that an uptrend may be reversing, while one below the zero line is seen as a sign of continuing downward momentum.

Signal line crossovers occur frequently, so they generate more false signals than any other MACD signal, especially in a sideways market, where price moves within a range without a clear trend. A signal line crossover indicates a change in momentum and is not a buy or sell instruction on its own.

A slower MACD signal occurs when the MACD line crosses the zero line.

MACD Zero Line Crossover

When the MACD line crosses above the zero line, the 12-period EMA has moved above the 26-period EMA, indicating upward momentum. When the MACD line crosses below the zero line, the 12-period EMA has fallen below the 26-period EMA, indicating downward momentum.

• A bullish zero line crossover is interpreted by traders as a sign that an uptrend may have started.
• A bearish zero line crossover is interpreted by traders as a sign that a downtrend may have started.

Zero line crossovers occur later and less frequently than signal line crossovers because the two EMAs take longer to cross than the MACD line and signal line do. A zero line crossover tends to confirm a trend change after it has begun. Sometimes MACD and price move in different directions, and this is called divergence.

MACD Divergence

MACD divergence occurs when price and MACD move in different directions, suggesting that the momentum behind a trend may be fading. A higher high is a peak above the previous peak, while a lower low is a trough below the previous trough.

• Bullish divergence forms when price makes a lower low but MACD makes a higher low, suggesting that selling momentum is fading.
• Bearish divergence forms when price makes a higher high but MACD makes a lower high, suggesting that buying momentum is fading.

Divergence can persist for a long time in a strong trend, with price continuing to rise or fall well after divergence first appears. Traders usually wait for a signal line crossover to confirm divergence.

The histogram often shows changes in momentum before the MACD line and the signal line cross.

Reading the MACD Histogram

Growing MACD histogram bars mean momentum in that direction is strengthening, while shrinking histogram bars mean momentum is fading.

• Growing bars above zero show strengthening upward momentum.
• Shrinking bars above zero show fading upward momentum, and a bearish crossover may follow.
• Growing bars below zero show strengthening downward momentum.
• Shrinking bars below zero show fading downward momentum, and a bullish crossover may follow.

Histogram bars shrinking towards zero mean the MACD line and the signal line are moving closer together. The histogram crosses zero at the exact moment the MACD line crosses the signal line, so a histogram crossing above zero is the same event as a bullish crossover.

A common follow-up question is what constitutes a good MACD value.

What Is a Good MACD Value?

There is no single ideal MACD value because MACD is measured in the same units as price and depends on how much the market’s price fluctuates. For example, if a $10 stock and a $100 stock both rise by the same percentage, the MACD reading for the $100 stock will be ten times larger, even though both trends have the same strength. A MACD reading is meaningful only when compared with its own historical readings on the same chart. Three checks reveal more than the number itself.

• The position of MACD relative to the zero line shows whether the 12-period EMA is above or below the 26-period EMA.
• The position of the MACD line relative to the signal line shows whether momentum is turning upwards or downwards.
• The size of the histogram bars shows whether momentum is growing or fading.

Unlike the relative strength index (RSI), MACD has no fixed overbought or oversold level. Overbought means price has risen too far, too quickly, while oversold means the opposite. A MACD reading far above its usual range on that chart can mean a trend is stretched, but a stretched reading alone is not a signal.

MACD vs RSI

MACD and RSI are both momentum indicators, but they measure different things. MACD tracks the gap between two EMAs to show trend direction and momentum, while RSI measures the speed and size of recent price changes on a fixed scale from 0 to 100 to show when price may be stretched.

Neither indicator is better because MACD and RSI answer different questions. MACD shows the direction of momentum and whether it is strengthening, while RSI shows whether price has moved unusually far in a short time. Many traders use MACD and RSI together, and combining the two is part of building a MACD trading strategy. Like every indicator, MACD has limitations.

Limitations of MACD

The biggest limitation of MACD is lag. MACD is a lagging indicator based on moving averages of past prices, so a MACD signal often appears after much of a price rise or fall has already occurred. MACD has five other limitations.

• MACD generates many false signals in a sideways market because the MACD line and the signal line repeatedly cross each other when there is no clear trend.
• MACD has no fixed overbought or oversold level, so it cannot show on its own when price has moved too far, unlike RSI with its levels of 70 and 30.
• MACD does not measure volatility, so a MACD signal looks the same whether price swings are small or large.
• MACD provides no support or resistance levels, which are prices at which a market has often stopped falling or rising. Traders therefore need other tools to decide where to place a stop-loss or profit target.
• Different MACD settings generate different signals on the same chart, so a crossover using 12, 26 and 9 may not appear using 5, 35 and 5.

MACD signals offer no guarantee, so traders usually confirm a MACD signal with other tools, such as RSI, moving averages or volume, and manage risk with a stop-loss. A stop-loss is an order that automatically closes a trade at a specified price to limit the loss. Traders address these limitations by incorporating MACD into a complete strategy.

Using MACD in a Trading Strategy

Traders incorporate MACD into three common types of strategies: signal line crossover strategies, zero line crossover strategies and divergence strategies. A MACD strategy turns the four MACD signals into fixed rules so that a trader knows in advance what qualifies as a valid signal and when a trade is no longer valid. Each MACD strategy usually adds a trend filter, such as taking signals only in the direction of a longer-term moving average, and a stop-loss to limit the loss when a signal fails. Entry rules, exit rules and worked examples for each strategy are available in the guide to MACD trading strategies.

FAQs

What Does MACD Tell You?

MACD tells you the direction of momentum and whether it is getting stronger or weaker. It does not tell you how far price will move, when a trend will end or whether a market is overbought, so traders use MACD alongside other tools, such as support and resistance levels.

Is MACD a Leading or Lagging Indicator?

MACD is a lagging indicator because it is based on moving averages of past prices. Some traders watch the MACD histogram for earlier indications of changing momentum, but every MACD signal still appears after the price has moved.

Which Timeframe Works Best for MACD?

MACD works on any timeframe, and no single timeframe is best for every trader. The default settings of 12, 26 and 9 were designed for daily charts. Higher timeframes generate fewer false signals, while lower timeframes generate more signals and more noise.

Does MACD Work for Forex, Stocks and Crypto?

MACD works on forex, stocks, crypto and any other market with price data because it only needs closing prices. MACD values are expressed in price units, so a MACD reading on a currency pair cannot be compared with a MACD reading on a stock or on bitcoin.

Is MACD a Good Indicator for Beginners?

MACD is one of the easier indicators for beginners to interpret because it has clear crossovers and a zero line. Beginners should still practise reading MACD on a demo account, which uses virtual money, and confirm MACD signals with other tools before trading with real money.

Do Professional Traders Use MACD?

MACD is a standard indicator on most charting platforms and in technical analysis courses, and many traders use it as a confirmation tool. Experienced traders usually check a MACD signal against other analysis rather than trading on MACD signals alone.