MACD stands for Moving Average Convergence Divergence. It is a momentum indicator that shows the gap between two moving averages and how that gap is changing. It helps you see the direction of a trend, how strong it is, and when momentum is turning. It is one of the most popular indicators in trading.
How MACD is built
MACD was developed by Gerald Appel in the late 1970s. It has three parts:
- The MACD line: the 12-period exponential moving average minus the 26-period exponential moving average. When the shorter average is above the longer one, the MACD line is above zero.
- The signal line: a 9-period exponential moving average of the MACD line.
- The histogram: the gap between the MACD line and the signal line, shown as bars. It was added later by Thomas Aspray.
The standard settings are written as 12, 26, 9. Most traders keep them.
Signal line crossovers
The most common signal: when the MACD line crosses above the signal line, momentum is turning up; when it crosses below, momentum is turning down. The histogram shows this clearly, flipping from below zero to above zero, or the other way.
Crossovers happen often, and many are false, especially in sideways markets. They work best in the direction of the bigger trend. Buy-side crossovers below the zero line in an uptrend (after a pullback) tend to be better quality than crossovers far above zero.
The zero line
When the MACD line crosses above zero, the 12-period average has moved above the 26-period average, which confirms an upward trend. A cross below zero confirms a downward trend. Zero-line crosses are slower than signal-line crosses but give fewer false signals.
Divergence
If the price makes a new high but the MACD makes a lower high, upward momentum is fading. That bearish divergence often comes before a pullback or a reversal. A lower low in price with a higher low on the MACD is bullish divergence. Treat divergence as a warning, then look for a price signal such as a trend line break before acting.
You can also draw trend lines on the MACD line itself. A break in the indicator's trend line can be an early hint that the price trend is changing.
Mistakes to avoid
- Trading every crossover in a choppy, sideways market.
- Forgetting that MACD lags. It is built from moving averages, so it confirms moves after they start.
- Comparing MACD values between different shares. The numbers depend on the price, so a MACD of 2 means something very different on a £5 share and a £500 share.
Related guides
This guide is for education only and is not financial advice. Trading carries risk; you can lose more than you expect.