MACD stands for “Moving Average Convergence Divergence”. This indicator utilizes moving averages, historical data, divergence and convergence to determine market momentum.
Components of the MACD Indicator
The MACD Indicator consists of three components: the MACD Line, the Signal Line, and the MACD Histogram.
MACD Line
The MACD Line is calculated by subtracting the 26-period EMA from the 12-period EMA.
When the line is above the zero line, it indicates more substantial buying power. when it is below, it suggests more substantial selling power.
Signal Line
The signal line is a 9-period EMA of the MACD Line, acting as a filter to reduce noise.
When the signal line crosses the MACD Line from below, it suggests increasing buyer momentum, and when it crosses from above, it indicates stronger seller activity.
MACD Histogram
The MACD histogram is composed of bars that visualize market momentum. It calculates the difference between the MACD Line and the Signal Line.
Positive bars show buyer dominance, while negative bars indicate seller control. The size of the bars reveals the strength of the trend.
5 Trading Strategies Using the MACD Indicator
The MACD indicator, through its diverse moving averages and formation of the MACD Line, Signal Line, and Histogram, allows traders to implement various strategies across all financial markets, including the Forex market, stocks, and crypto. These strategies include:
- The Crossover Strategy
- The Histogram Reversal Strategy
- The Zero Crosses Strategy
- The Divergence Trading Strategy
- MACD Momentum Waves Strategy
The Crossover Strategy
When the Signal Line crosses the MACD Line, it signals a potential trend change.
If the Signal Line crosses the MACD Line from below, it indicates a buy signal, and if it crosses from above, it indicates a sell signal.
Note: Combining the crossover strategy with other technical tools, such as support and resistance levels, increases the validity of the signals.
The Histogram Reversal Strategy
Changes in the histogram bars on higher timeframes (daily and 4H) indicate shifts in buyer/seller strength.
A shift from positive to negative bars signals more substantial selling pressure (Sell Signal),
while a change from negative to positive indicates growing buyer power (Buy Signal).
Note: The trading strategy is more reliable when the price is near support/resistance levels. Longer histogram bars also enhance signal strength.
The Zero Crosses Strategy
The zero line in MACD represents market indecision and balance between buyers and sellers.
- When the MACD Line moves below the zero line and crosses it, it indicates a bullish reversal;
- When the MACD Line moves from above and drops below the zero line, it indicates a bearish reversal.
Note: The Zero Crosses strategy gains more credibility in higher timeframes (Daily/4H) and when breaking key support or resistance levels.
The Divergence Trading Strategy
A divergence occurs when the highs and lows of price action move in the opposite direction to the MACD.
- Bullish Divergence: Price makes lower lows, while MACD makes higher lows (Possible buy setup);
- Bearish Divergence: Price forms higher highs, while MACD forms lower highs (Possible sell setup).
Note: Combining divergence with classic chart patterns reduces false signals and enhances entry accuracy.
MACD Momentum Waves Strategy
The strategy identifies market momentum shifts using histogram bar sizes and MACD Line movements.
- Buy Setup: MACD and histogram are below the zero line. Histogram bars shrink, and MACD rises toward and crosses zero (Buy signal);
- Sell Setup: MACD and histogram are above zero. Histogram bars weaken, and MACD drops toward and crosses zero (Sell signal).
Pros and Cons of MACD
Understanding MACD's strengths and limitations reveals where it is most effective and when additional filters are required:
Pros | Cons |
Combining trend and momentum analysis | False signals in ranging markets |
Usable in multiple timeframes | Delayed signals due to moving averages |
Detecting trend shifts via zero-line cross | No definitive signals from line crossovers |
Highlighting momentum weakness through divergence | Unstable histogram behavior in some cases |
Easily combined with other technical tools | Needs extra filters in high-volatility markets |
MACD Settings
MACD has default settings useful for mid-term trading. However, settings vary based on trading style:
Trading Style | Best Timeframe | MACD Line Settings | Signal Line Settings | Characteristic |
Scalping | 1 to 15 minutes | (5,13,16) | EMA (5) | Very fast reaction |
Day Trading | 15 min to 1 hour | (5,21,8) | EMA (5) | Reduced signal noise |
Swing Trading | 4H to Daily | (9,26,12) | EMA (9) | Standard settings |
Position Trading | Daily to Weekly | (18,52,24) | EMA (18) | Focus on major trends |
Conclusion
The MACD indicator analyzes market structure and momentum by combining moving averages.
Its three components the MACD Line, Signal Line, and Histogram simultaneously reflect trend changes and momentum weakness.
MACD trading strategies such as the Crossover Strategy, the Histogram Reversal Strategy, and the Zero Crosses Strategy offer different methods for trend analysis and trade entries.
