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  1. Beginner
    Early Stages for Beginners
    8 Topics
  2. Forex Terminology
    11 Topics
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    2 Topics
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    2 Topics
  5. Psychology for Beginners
    7 Topics
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    Identifying Scams
    2 Topics
  7. Brokers for Beginners
    5 Topics
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    13 Topics
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    5 Topics
  10. Completion
    Risk Management for Beginners
    8 Topics
  11. Fundamental Analysis
    9 Topics
  12. Advanced
    Using Indicators
    6 Topics
  13. Technical Analysis (Part 2)
    8 Topics

Moving Average Convergence Divergence (MACD)

The MACD is a bit more complex than both the RSI and Stochastic. It acts both as a momentum and trend-following indicator. It combines two exponential moving averages (EMAs), with the MACD line calculated by subtracting the 26-period EMA from the 12-period EMA.

However, while the MACD is calculated from two EMAs, the two lines shown on the chart are not the EMAs – they’re not displayed at all except for used for calculations. That being said, here is what the indicator is made of:

  • The MACD line – it reflects the distance between the two EMAs as mentioned above;
  • The signal line – it is a 9-period EMA of the MACD line itself and is plotted on the MACD line. Its function is somewhat similar to the %D line in Stochastic.
  • The histogram – the MACD indicator has a beautiful histogram, whose main function is to show the difference between the MACD line and the signal line.

How to Use MACD?

It goes without saying that such a multifunctional technical indicator can be used in many ways and can also be combined with other indicators. Here are the main types of signals provided by MACD:

  • MACD crossover – the main signal of the MACD occurs when its line crosses the signal line in either direction. For example, when the MACD breaks above its signal line, traders consider it to be a strong bullish signal and go long. Similarly, when the MACD line crosses over the signal line from top to bottom, traders go short and/or close their long positions.
    To get even more accurate signals, you may also keep an eye on the histogram, which should initially increase or decrease, depending on the existing trend.

  • MACD divergences – The MACD indicator is also used for divergences, and you already know the rules – higher highs of the price along with lower highs on the MACD line suggests that the uptrend is weakening, and lower lows of the price together with higher lows on MACD points to the potential reversal of the bearish trend.
  • MACD Histogram – The histogram also provides decent signals, and they can be used either separately or in combination with the signals delivered by the crossovers of the lines. 

In any case, when the histogram breaks above its zero line (center line) and starts to gradually increase, traders consider it a Buy signal, as shown in the illustration below. The same could be applied for Sell signals with a gradual decrease. 

In fact, the histogram touches its center line whenever the two lines cross each other, as it actually represents the distance between the two. Thus, the fact that the histogram is widening in either direction confirms the formation of an uptrend or downtrend, depending on whether it’s above or below 0.