When To Use And How To Read The MACD Indicator

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This technical analysis guide explains what the moving average convergence divergence indicator (MACD) is, and how traders use it to exercise trading strategies.

We explore what the MACD indicator looks like on an example chart and how you can read it to gain trading insight.

Read on to learn about moving average crossovers, buy and sell signals, the MACD histogram, and divergences.

What Is The MACD Indicator?

The MACD indicator, also known as the MACD oscillator, is one of the most popular technical analysis tools.

There are three main components of the MACD shown in the picture below:

  1. MACD: The 12-period exponential moving average (EMA) minus the 26-period EMA.
  2. MACD Signal Line: A 9-period EMA of the MACD.
  3. MACD Histogram: The MACD minus the MACD Signal Line.
MACD moving average convergence divergence

Ways To Interpret The MACD Index

The MACD indicator is a versatile tool. There are three main ways to interpret the MACD technical analysis indicator, discussed in the following three sections:

  1. Moving Average Crossovers
  2. MACD Histogram
  3. MACD Divergences

How To Read MACD Moving Average Crossovers

The primary method of interpreting the MACD is with moving average crossovers.

When the shorter-term 12-period exponential moving average (EMA) crosses over the longer-term 26-period EMA a potential buy signal is generated.

Important: The difference between short-term moving averages and long-term moving averages is that short-term MAs are used for smaller time-frames to find the moving average, while long-term MAs are used for wider time-frames. The underlying function is the same.

This is seen on the Nasdaq 100 exchange traded fund (QQQQ) chart below with the two purple lines.

MACD moving average crossovers

Remember that the MACD line (the blue line) is created from the 12-period and 26-period EMA. Consequently:

  1. When the shorter-term 12-period EMA crosses above the longer-term 26-period EMA, the MACD line crosses above the Zero line.
  2. When the 12-period EMA crosses below the 26-period EMA, the MACD line crosses below the Zero line.

How To Use Moving Average Crossover To Spot Buy Signals

A possible buy signal is generated when the MACD (blue line) crosses above the zero line.

How To Use Moving Average Crossover To Spot Sell Signals

When the MACD crosses below the zero line, then a possible sell signal is generated.

The prior potential buy and sell signals might get a person into a trade later in the move of a stock or future.

MACD buy and sell signals

Another potential buy and sell signal is shown in the graph above in the Nasdaq 100 exchange-traded fund QQQQ chart.

Most Common MACD Potential Buy and Sell Signals

Traders get valuable insight from the MACD in the form of potential buy and sell signals.

How To Read A Potential MACD Buy Signal

A potential buy signal is generated when the MACD (blue line) crosses above the MACD Signal Line (red line).

How To Read A Potential MACD Sell Signal

Similarly, when the MACD crosses below the MACD Signal Line a possible sell signal is generated.

The MACD moving average crossover is one of many ways to interpret the MACD technical indicator. Using the MACD histogram and MACD divergence warnings are two other methods of using the MACD.

How To Read A MACD Histogram

The MACD Histogram is simply the difference between the MACD line (blue line) and the MACD signal line (red line). The MACD histogram is illustrated in the chart below of the Nasdaq 100 QQQQ’s:

MACD Histogram

Two important terms are derived from the MACD histogram and are illustrated in the QQQQ chart above:

What Does The MACD Convergence Show?

The MACD histogram is shrinking in height. This occurs because there is a change in direction or a slowdown in the stock, future, bond, or currency trend.

When that occurs, the MACD line is getting closer to the MACD signal line.

What Does The MACD Divergence Show?

The MACD histogram is increasing in height (either in the positive or negative direction).

This occurs because the MACD is accelerating faster in the direction of the prevailing market trend.

Shrinking MACD Histogram: What Does It Mean?

When a stock, future, or currency pair is moving strongly in a direction, the MACD histogram will increase in height.

When the MACD histogram does not increase in height or begins to shrink, the market is slowing down and might be warning of a possible reversal.

If you already understand how to use the MACD index, you can explore some of our commodity guides to find a suitable asset to practice with, like precious metals, energies, and agricultural commodities. Alternatively, you can see our stock trading guide.

The graph below of the E-mini Nasdaq 100 Index Future shows this phenomenon:

MACD histogram buy and sell signals

How To Find The Peak And Trough

The letter “T” represents when the top or peak of the moving average convergence divergence histogram occurs. In contrast, the letter “B” shows when the bottom of the MACD histogram occurs.

Notice in this example how closely the tops and bottoms of the MACD histogram are to the tops of the Nasdaq 100 e-mini future price action.

Potential Buy Signal With MACD Histograms

When the MACD histogram is below the zero line and begins to converge towards the zero line.

Potential Sell Signals With MACD Histograms

When the MACD histogram is above the zero line and begins to converge towards the zero line.

Note: In the above example, three consecutive days of the shrinking MACD histogram from top or bottom served as possible buy or sell signals, these are shown with arrows.

This is an aggressive example. A trader might wait until the MACD histogram went to zero, but that would be the same signal as the MACD moving average crossover.

In addition to signaling, potential buy or sell signals, the moving average convergence divergence could be used for warnings of potential change in the direction of stocks, futures, and currency pairs.

What Are MACD Divergences?

Divergences might signal a trader to get out of a long or short position before profits erode.

  • Bearish divergence occurs when a technical analysis indicator is suggesting that a price should be going down but the price of the stock, future, or currency pair is continuing to maintain its current uptrend.
  • Bullish divergence occurs when the indicator is indicating that price should be bottoming and heading higher, yet the actual price action is continuing downward.
MACD price divergences and confirmations
This chart of the E-mini S&P 500 Index Future shows bearish and bullish divergences.

How To Read High #1 to High #2

Looking at the E-mini S&P 500 future, from High #1 to High #2, the futures contract made higher highs, which is usually viewed as bullish. However, the MACD moving average failed to make a new high.

This bearish divergence acted as an early warning sign of things to come with the E-mini S&P 500 futures contract.

How To Read Low #1 to Low#2

In yet another bearish sign for the E-mini S&P 500 futures contract, the future made higher lows from Low #1 to Low #2, which again is usually considered positive.

Nevertheless, the MACD technical indicator made a clear lower low from Low #1 to Low #2. This bearish divergence warned of the impending downturn of the S&P 500 future and the market as a whole.

How To Read Low #2 to Low #3

In addition to bearish and bullish divergences, the MACD might confirm price movement as well.

The E-mini S&P 500 futures contract made a substantial lower low which was confirmed by the MACD when it made a lower low as well.

As seen throughout the MACD sections, the moving average convergence divergence is a versatile tool giving a trader possible buy and sell entries and giving warnings of potential price changes.

Where Can I Start Trading And Using MACD?

If you are interested in trading using technical analysis, have a look at our reviews of these regulated brokers in to learn which charting tools they offer:

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. <b>Between 74%-89% of retail investor accounts lose money when trading CFDs.</b> You should consider whether you can afford to take the high risk of losing your money.

FAQs

Who invented the MACD?

The moving average convergence divergence (MACD) index was invented by Gerald Appel in the 1970s. Appel designed the MACD as a technical analysis tool to gain insight on stock prices, with the intent to reveal data about the stock’s momentum, strength, as well as directional assumptions.

What is the difference between MACD and RSI?

While the moving average convergence divergence (MACD) indicator measures the difference between two separate exponential moving averages (EMAs), the relative strength index (RSI) measures the difference in selected price highs and lows in a chart. These technical analysis tools are used together by traders.

What is the best time frame for MACD?

There is no one best time frame to use the MACD index in. The MACD provides insight on potential divergence within any given time frame on a chart. The best time frame to use with the MACD depends on the type of trade, instrument, and stock that you’re interested in creating and executing a strategy for.

Further Reading

Learn more about technical analysis charting concepts and strategies including Momentum, Volatility, Time Series Forecast, Typical Price Moving Average, Point & Figure, Open Interest, Standard Error Bands, Market Thrust, and Average Directional Movement.

You can explore other technical oscillators, like:

If you’d like a primer on how to trade commodities in general, please see our introduction to commodity trading, our guides on trading specific instruments like CFDs, forex, cryptocurrencies, stocks, and options.

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