What Is MACD?

The moving average convergence/divergence indicator helps investors identify price trends

What Is MACD?

Moving average convergence/divergence (MACD) is a technical indicator to help investors identify price trends, measure trend momentum, and identify market entry points for buying or selling. Moving average convergence/divergence (MACD) is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs) of a security’s price. MACD was developed in the 1970s by Gerald Appel.

Key Takeaways

  • Moving average convergence/divergence (MACD) is a technical indicator to help investors identify market entry points for buying or selling.
  • The MACD line is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.
  • The signal line is a nine-period EMA of the MACD line.
  • MACD is best used with daily periods, where the traditional settings of 26/12/9 days is the default.

What MACD Signals

The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA. The calculation creates the MACD line. A nine-day EMA of the MACD line is called the signal line, plotted on top of the MACD line, which can function as a trigger for buy or sell signals.

Traders may buy the security when the MACD line crosses above the signal line and sell—or short—the security when the MACD line crosses below the signal line. MACD indicators can be interpreted in several ways, but the more common methods are crossovers, divergences, and rapid rises/falls.

MACD Formula

MACD = 12-Period EMA   26-Period EMA \text{MACD}=\text{12-Period EMA }-\text{ 26-Period EMA} MACD=12-Period EMA  26-Period EMA

MACD is calculated by subtracting the long-term EMA (26 periods) from the short-term EMA (12 periods). An EMA is a moving average (MA) that places a greater weight and significance on the most recent data points.

The exponential moving average is also an exponentially weighted moving average. An exponentially weighted moving average reacts more significantly to recent price changes than a simple moving average (SMA).

Using MACD

MACD has a positive value (shown as the blue line in the lower chart) whenever the 12-period EMA (indicated by the red line on the price chart) is above the 26-period EMA (the blue line in the price chart) and a negative value when the 12-period EMA is below the 26-period EMA. The level of distance that MACD is above or below its baseline indicates that the distance between the two EMAs is growing.

In the chart below, the two EMAs applied to the price chart correspond to the MACD (blue) crossing above or below its baseline (red dashed) in the indicator below the price chart.

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Image by Sabrina Jiang © Investopedia 2022

MACD is often displayed with a histogram (see the chart below) that graphs the distance between MACD and its signal line. If MACD is above the signal line, the histogram will be above the MACD’s baseline or zero line. If MACD is below its signal line, the histogram will be below the MACD’s baseline. Traders use the MACD’s histogram to identify when bullish or bearish momentum is high and possibly for overbought/oversold signals.

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Image by Sabrina Jiang © Investopedia 2022

MACD vs. Relative Strength

The relative strength index (RSI) signals whether a market is considered overbought or oversold to recent price levels. The RSI is an oscillator that calculates average price gains and losses over a given period. The default period is 14 periods with values bounded from 0 to 100. A reading above 70 suggests an overbought condition, while a reading below 30 is considered oversold, with both potentially signaling a top or a bottom is forming.

The MACD lines, however, do not have concrete overbought/oversold levels like the RSI and other oscillator studies. Rather, they function on a relative basis. An investor or trader should focus on the level and direction of the MACD/signal lines compared with preceding price movements in the security at hand, as shown below.

MACD divergence

MACD measures the relationship between two EMAs, while the RSI measures price change to recent price highs and lows. These indicators are used together to give analysts a more complete technical picture.

Both measure momentum in a market, but because they measure different factors, they sometimes give contrary results. The RSI may show a reading above 70 (overbought) for a sustained period, indicating a market is overextended to the buy side of recent prices. In contrast, the MACD indicates that the market is still increasing in buying momentum. Either indicator may signal an upcoming trend change by showing divergence from price (price continues higher while the indicator turns lower, or vice versa).

Limitations of MACD

A moving average divergence can signal a possible reversal, but no actual reversal produces a false positive. False positive divergences often occur when the price of an asset moves sideways in a consolidation, such as in a range or triangle pattern following a trend. A slowdown in the momentum—sideways movement or slow trending movement—of the price will cause MACD to pull away from its prior extremes and gravitate toward the zero lines even in the absence of a true reversal.

Confirmation should be sought by trend-following indicators, such as the Directional Movement Index (DMI) system and its key component, the Average Directional Index (ADX). The ADX is designed to indicate whether a trend is in place, with a reading above 25 indicating a trend is in place (in either direction) and a reading below 20 suggesting no trend is in place.

Investors following MACD crossovers and divergences should double-check with the ADX before trading on an MACD signal. While MACD may show a bearish divergence, a check of the ADX may cite a higher trend in place. Investors would avoid the bearish MACD trade signal and wait to see how the market develops. If MACD shows a bearish crossover and the ADX is in non-trending territory (<25) and has likely shown a peak and reversal, investors could take the bearish trade.

MACD Crossovers

As shown on the following chart, when MACD falls below the signal line, it is a bearish signal indicating that it may be time to sell. Conversely, when MACD rises above the signal line, the signal is bullish, suggesting that the asset's price might experience upward momentum. Crossovers are more reliable when they conform to the prevailing trend. If MACD crosses above its signal line after a brief downside correction within a longer-term uptrend, it qualifies as a bullish confirmation and the likely continuation of the uptrend.

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Image by Sabrina Jiang © Investopedia 2022

If MACD crosses below its signal line following a brief move higher within a longer-term downtrend, traders would consider that a bearish confirmation.

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Image by Sabrina Jiang © Investopedia 2022

MACD Divergence

When MACD forms highs or lows that exceed the corresponding highs and lows on the price, it is called a divergence. A bullish divergence appears when MACD forms two rising lows that correspond with two falling lows on the price. This is a valid bullish signal when the long-term trend is still positive.

Some traders will look for bullish divergences even when the long-term trend is negative because they can signal a change in the trend, although this technique is less reliable.

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Image by Sabrina Jiang © Investopedia 2022

When MACD forms a series of two falling highs that correspond with two rising highs on the price, a bearish divergence has been formed. A bearish divergence that appears during a long-term bearish trend is considered confirmation that the trend is likely to continue.

Some traders will watch for bearish divergences during long-term bullish trends because they can signal weakness in the trend. However, it is not as reliable as a bearish divergence during a bearish trend.

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Image by Sabrina Jiang © Investopedia 2022

Example of Rapid Rises or Falls

When MACD rises or falls rapidly (the shorter-term moving average pulls away from the longer-term moving average), it signals that the security is overbought or oversold and will soon return to normal levels. Traders often combine this analysis with the RSI or other technical indicators to verify overbought or oversold conditions.

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Image by Sabrina Jiang © Investopedia 2022

It is not uncommon for investors to use the MACD’s histogram the same way they may use the MACD itself. Positive or negative crossovers, divergences, and rapid rises or falls can be identified on the histogram. Some experience is needed before deciding which is best in any given situation because there are timing differences between signals on the MACD and its histogram.

How Do Traders Use Moving Average Convergence/Divergence (MACD)?

Traders use MACD to identify changes in the direction or strength of a stock’s price trend. MACD can seem complicated at first glance because it relies on additional statistical concepts such as the exponential moving average (EMA). But fundamentally, MACD helps traders detect when the recent momentum in a stock’s price may signal a change in its underlying trend. This can help traders decide when to enter, add to, or exit a position.

Is MACD a Leading Indicator or a Lagging Indicator?

MACD is a lagging indicator. After all, all the data used in MACD is based on the historical price action of the stock. Because it is based on historical data, it lags the price. However, some traders use MACD histograms to predict when a change in trend will occur. For these traders, this aspect of MACD might be viewed as a leading indicator of future trend changes.

What Is a MACD Bullish/Bearish Divergence?

A MACD positive (or bullish) divergence is a situation in which MACD does not reach a new low, despite the price of the stock reaching a new low. This is seen as a bullish trading signal—hence, the term “positive/bullish divergence.” If the opposite scenario occurs—the stock price reaches a new high, but MACD fails to do so—this would be seen as a bearish indicator and termed “negative/bearish divergence.” In both cases, the setups suggest that the move higher/lower will not last, so investors need to look at other technical studies, like the relative strength index (RSI).

The Bottom Line

MACD is a moving average, best used with daily data. Just as a crossover of the nine- and 14-day SMAs may generate a trading signal for some traders, a crossover of the MACD above or below its signal line may also generate a directional signal. MACD is based on EMAs with more weight placed on the most recent data, which means that it can react very quickly to changes of direction in the current price move. Crossovers of MACD lines should be noted, but confirmation should be sought from other technical signals, such as the RSI, or perhaps a few candlestick price charts. Because it is a lagging indicator, MACD argues that confirmation in subsequent price action should develop before taking the signal.

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  1. CMT Association. "Gerald Appel."

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