Another advantage of the MACD is it can be a relatively simple indicator. Investors can pair the MACD with othertechnical indicatorsfor a more comprehensive analysis. Pronounced “mack-dee” (though sometimes “M-A-C-D”), the MACD indicator can help investors try to forecast the ways a stock might perform based on its current data and past movements. Keep in mind, past performance does not guarantee future results. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Stay on top of upcoming market-moving events with our customisable economic calendar. How to Use the MACD Indicator Rayner Teo is an independent trader, ex-prop trader, and founder of TradingwithRayner.

Bullish Divergence

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options. https://www.bigshotrading.info/ You may notice the MACD histogram bars move above and below a zero line. Movement around this zero line can help indicate the strength of a stock trend as well as potential trade entry points. Because the indicator measures momentum, analysts believe the price action will follow the momentum.

The fast line crossed below the signal line and went below the zero line. Let’s look at figure 2 for an example of how to use the MACD crossover and divergence. You can even use MACD in your automated trading strategies with this decision recipe.

MACD Setup

Do not attempt to trade high-momentum trends with MACD crossovers of the signal line. This gave an opportunity to traders who may have missed buying the cross above the centerline. The sell signal was generated on Feb. 16 just as the ADA/USDT pair was starting a deep correction. The default value used for the MACD indicator by most charting software is the 12- to 26-day combination.

In the image below, both bullish and bearish scenarios are defined. The period between candles is arbitrary and can be adjusted at a trader’s discretion. The bearish scenario is equal and opposite of the bullish scenario.

How the MACD indicator works

The difference between the MACD series and the average series represents a measure of the second derivative of price with respect to time (“acceleration” in technical stock analysis). This estimate has the additional lag of the signal filter and an additional gain factor equal to the signal filter constant. As the D in MACD, “divergence” refers to the two underlying moving averages drifting apart, while “convergence” refers to the two underlying moving averages coming towards each other.

Technical indicators use formulas to generate data points and analyze price action. Investors use indicators for trading alerts, to confirm other indicators, forecast prices, and guide entry and exit decisions.

Zero line crossovers

These two indicators are often used together to give analysts a more complete technical picture of a market. When the MACD line crosses from above to below the signal line, the indicator is considered bearish. When the MACD line crosses from below to above the signal line, the indicator is considered bullish. The MACD and average series are customarily displayed as continuous lines in a plot whose horizontal axis is time, whereas the divergence is shown as a bar chart . When the MACD diverges from the price action, it can signal the end of a trend.

MACD can be observed with price to find areas of divergence, which can give another trading signal. Back during the 2017 bull run, a bearish 1D cross on the MACD indicator could have told you to sell your Bitcoin right at the top. Finally, the histogram represents the distance of the MACD line from the signal line. It will either be positive when the MACD line is above the signal line, or negative when the signal line is above the MACD. You may want to test the environment with virtual money with a Demo account.