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# MACD Indicator Explained

The Moving Average Convergence Divergence (MACD) indicator is a type of oscillator that is widely used by traders for technical analysis (TA). MACD is a trend-following tool that uses moving averages to determine the momentum of a stock, cryptocurrency, or other tradeable assets.

The Moving Average Convergence Divergence indicator, developed by Gerald Appel in the late 1970s, tracks pricing events that have already occurred and thus fall into the category of lagging indicators (Provide signals based on data or past price behavior). MACD can be used to measure market dynamics and potential price trends and is used by many traders to identify potential entry and exit points.

Before delving into the MACD mechanisms, it is critical to understand the concept of moving averages. A moving average (MA) is simply a line that represents the average value of previous data over a set period of time. Moving averages are among the most popular indicators for technical analysis (TA) in financial markets, and they are classified into two types: simple moving averages (SMAs) and exponential moving averages (EMAs) (EMAs). Although SMA weights all data sets equally, EMA prioritizes the latest data value (latest price point).

## How MACD Functions

The MACD indicator is calculated by subtracting two exponential moving averages (EMAs) to form the mainline (MACD line), which is then used to calculate another EMA that represents the signal line.

Additionally, there is the MACD histogram. The MACD histogram is calculated based on the differences between these two lines. The histogram fluctuates with the other two lines above and below the centerline (also called the zero line).

As a result, the MACD indicator is made up of three moving elements around the zero line:

The MACD line (1): aids in determining whether momentum is ascending or descending (market trend). It is calculated by dividing two exponential moving averages by two (EMA).

The second signal line (2): is the EMA of the MACD line (usually a 9-period EMA). The combination of the signal line and MACD line analysis can be used to identify potential reversals or entry and exit points.

Histogram (3): A graphical representation of the divergence and convergence of MACD and signal lines. In other words, the histogram is obtained from the difference between the two lines. ## The MACD line

Generally, the exponential moving average is measured using the closing price of the asset, and the time period used to calculate the two EMAs is usually set to 12 time periods (faster) and 26 time periods (slower). The period can be set in different ways (minutes, hours, days, weeks, months), but this article will focus on daily settings. However, the MACD indicator can be customized for different trading strategies.

The MACD line is calculated using the standard time frame by subtracting the 26-day EMA from the 12-day EMA.

`MACD line = 12d EMA - 26d EMA `

As previously stated, the MACD Line oscillates above and below the zero line, which is represented by the midline intersection. By notifying traders when the 12-day and 26-day EMAs change their relative positions.

## The signal line

The standard signal line is calculated based on the 9-day EMA of the main line, so it provides additional information about your previous movements.

`Signal line = 9d EMA of MACD line`

Although the MACD line and the signal line are not always accurate when they cross, these events are usually interpreted as trend reversal signals, especially if they occur at the extreme points of the MACD chart (well above or well below the zero line).

## The MACD histogram

The histogram is just a visual record of the relative movement of the MACD line and the signal line. Its calculation method is very simple, just subtract one from the other:

`MACD histogram = MACD line - signal line`

Instead of including a third moving line, the histogram is made up of histograms, making it easier to read and visualize. Please keep in mind that the bars in the histogram have nothing to do with the asset's trading volume.

## MACD settings

As mentioned earlier, the default setting of MACD is based on EMA with 12, 26 and 9 periods, so MACD (12, 26, 9). However, some technical analysts and charts are changing the cycle as a trading method. index. For example, MACD (5, 35, 5) is often used in combination with longer time frames (such as weekly or monthly charts) in traditional financial markets.

It is worth noting that due to the high volatility of the cryptocurrency market, increasing the sensitivity of the MACD indicator may be risky, as it may lead to more false signals and misleading information.

## How to read MACD charts

As the name implies, the moving average convergence indicator tracks the relationship between moving averages. The correlation between two lines can be described as convergence or divergence. When two lines attract each other, they converge and diverge when they separate.

However, the corresponding MACD indicator signal is associated with the so-called crossover, which occurs when the MACD line exceeds or falls below the center line (crosses the center line) or is lower or lower than the signal line (crosses the signal line).

Keep in mind that the intersection of the center line and the signal line may occur multiple times and generate a large number of false and misleading signals, especially when it comes to volatile assets such as cryptocurrencies. Therefore, don't rely solely on the MACD indicator.

## Centerline crossovers

When the MACD line moves in the positive or negative zone, the midline crossover occurs. When it crosses the midline, a positive MACD indicates that the 12-day EMA is higher than the 26-day EMA. On the contrary, when the MACD line is lower than the midline, it indicates that the MACD is negative, which means that the 26-day average is higher than the 12-day average. In other words, a positive MACD line indicates stronger bullish momentum. Stronger downward momentum.

## Signal line crossover

Traders usually interpret the crossing of the MACD line over the signal line as a potential buying opportunity (entry point). When the MACD line crosses the signal line, traders typically regard it as a selling opportunity (exit point).

Signal switches may be useful, but they are not always reliable. It is also worth considering their position on the chart to minimize risk. For example, if the crossover requires buying, but the MACD line indicator is below the midline (negative value), the market conditions can still be considered bearish. Conversely, if the signal line crosses indicate a potential selling point, but the MACD line indicator is positive (above the zero line), then market conditions may remain bullish. In this case, following the sell signal may be more risky (taking into account the broader trend).

## MACD and price divergences

In addition to the intersection of the middle line and the signal line, the MACD chart can also provide information about the divergence between the MACD chart and asset price changes.

For example, if the price movement of a cryptocurrency reaches a higher high while the MACD reaches a lower high, we will have a bearish divergence, indicating that, despite the price spike, the bullish momentum (buying pressure) is not as strong as it once was. Yes. Because price reversals precede bearish divergences, they are usually interpreted as sales opportunities.

Conversely, if the MACD line forms two upward lows that coincide with the two downward lows of the asset, it is considered a bullish divergence, indicating that despite the price decline, the buying pressure is greater. This may indicate a short-term low (from falling to rising).

## Closing thoughts

The moving average convergence and divergence oscillator is one of the most useful tools for technical analysis, not only because it is simple to use, but also because it is powerful enough to detect market trends and momentum.

However, MACD, like most TA indicators, is not always accurate and can send many false and misleading signals, particularly when dealing with volatile assets, weak trends, or sideways price movements. As a result, many traders combine MACD with other indicators such as the RSI indicator to reduce risk and confirm the signal.

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