The MACD indicator (Moving Average Convergence Divergence) is a trend-following indicator used across all financial markets, including Forex Market and crypto markets.
This indicator identifies the overall trend, divergence, and convergence of price using two moving averages.
The settings of the MACD are customizable, allowing it to be used effectively in both short-term and long-term trades.
What is MACD?
The MACD (Moving Average Convergence Divergence) Indicator is designed based on the difference between two exponential moving averages (EMA) to measure price momentum.
This indicator issues signals in various ways, which are widely used in the technical analysis of MACD indicator trading strategies.
Types of MACD Indicators
Numerous indicators have been developed based on the MACD, mostly enhanced, smart, or combined versions. These indicators typically aim to:
- Increase signal accuracy
- Filter out noise
- Automatically detect divergences
- Combine MACD with other tools
Among combined tools, we can refer to the MACD, RSI, and AO Divergence Combination Indicator within the TradingFinder (TFLAB) indicator set:
- MACD, RSI, and AO Divergence Combination Indicator for MT4
- MACD, RSI, and AO Divergence Combination Indicator for MT5
- MACD, RSI, and AO Divergence Combination Indicator for TradingView
Advantages and Disadvantages of MACD
Since the MACD indicator relies on historical market data, there is a delay in its signals; however, the combination of two EMAs offers insights not easily seen in simple chart analysis. Pros and cons of the MACD:
Disadvantages | Advantages |
Signal delay | Strong trend identification |
High signal noise | Combination of multiple tools |
Requires additional confirmation | Divergence detection |
Dependent on settings | Simplicity in analysis |
Inefficiency in low-momentum trends | Suitable for all markets |
Components of MACD
The MACD consists of three main components, and their movements combined are used to analyze price momentum and trend:
- MACD Line
- Signal Line
- Histogram
MACD Line
The MACD Line is the difference between two exponential moving averages (EMA). It shows momentum changes.
When the MACD Line moves upwards, momentum is bullish; when it moves downwards, momentum is bearish.
The first sign of weakness or momentum shift is the change in the direction of the MACD Line; its slope indicates the strength or weakness of the momentum.
Signal Line
The Signal Line is a 9-period EMA of the MACD Line, which helps smooth out MACD noise and reduces false signals.
The angle and distance between the two lines represent price momentum. Their crossover is one of the most widely used MACD indicator signals.
Histogram
The Histogram of the MACD is the difference between the MACD Line and the Signal Line, displayed as vertical bars on the chart.
Its purpose is to show the strength and direction of momentum.
When the histogram bars move positive, the momentum is bullish; when they move negative, momentum is bearish. The longer the bars, the stronger the momentum.
MACD Settings
The default MACD indicator settings are suitable for long-term trading and analyzing general price trends and momentum.
For short-term and medium-term trading, adjustments are necessary:
Feature | Signal Line Settings | MACD Line Settings | Suitable Timeframes | Trading Style |
High Sensitivity | EMA (5) | (5,13,16) | 1 to 15 minutes | Short-term trading |
Reduced False Signals | EMA (5) | (5,21,8) | 15 minutes to 1 hour | Medium-term trading |
High Signal Validity | EMA (9) | (9,26,12) | 4H to Daily | Long-term trading |
Example of MACD Working Properly in Trading
In the 1-hour Nasdaq index (US100) chart, the price forms a lower high, but the indicator forms a higher high.
The MACD indicator lines also form a higher high, confirming divergence. The MACD Line crossing the Signal Line downward provides the final confirmation for a price drop, and the price eventually falls.
Comparison of MACD and RSI Indicators
The MACD is a hybrid trend-following and oscillator indicator, while the RSI is a pure oscillator that measures the relative strength of price movements.
The table below offers a full comparison:
Feature | MACD Indicator | RSI Indicator |
Type | Trend + Momentum | Momentum Oscillator |
Oscillation Range | No fixed range | 0 to 100 (typically 70/30) |
Main Signals | Crossovers/Divergence | Overbought/Oversold |
Performance in Trends | Stronger in trending markets | Better in ranging markets |
Delay | More, due to moving averages | Less delay |
Default Settings | (12, 26, 9) | 14 periods |
Strengths | Identifying trend starts and ends, histogram combination | Detecting overbought/oversold easily |
Weaknesses | False signals in ranging markets, need for confirmation | False signals in strong trends, noise in lower timeframes |
Combination Capability | Compatible with other technical tools | Compatible with other technical tools |
Conclusion
Momentum analysis in the MACD indicator is based on the behavior of the MACD Line, Signal Line, and Histogram, especially when they form a valid divergence structure.
This indicator can be used in long-term, medium-term, and short-term trades with different settings.
In low-momentum markets, relying solely on MACD may lead to errors; combining indicators like MACD + RSI + AO is better under such conditions.
