Lesson T6.3 · 3 of 7 · Trend indicators
MACD indicator explained: MACD line, signal line and histogram
MACD is the gap between the 12-day and the 26-day exponential moving averages of the price. The signal line is a 9-day EMA of MACD, and the histogram is the distance between the two. Because it is built from moving averages, MACD lags the price and gives false signals when the market has no trend.
Terms in this lesson
- MACD
- The gap between a fast and a slow average of the price: it shows changes in pace.
- Moving average
- The average price over the last trading days: the trend without the noise.
- Stop-loss
- An order that sells automatically if the price falls to a level you choose.
How MACD is calculated: MACD line, signal line and histogram
Definition
What is MACD?
The distance between a fast (12-day) and a slow (26-day) exponential moving average.
MACD stands for Moving Average Convergence Divergence: the averages come together (converge) or pull apart (diverge). Gerald Appel developed it in the late 1970s. It is drawn below the price chart, with a zero line in the middle.
Positive when the fast average is above the slow one, negative the other way round.
An average of MACD, so it follows it, more slowly.
The bars show how far MACD is from the signal line.
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Create a free accountMACD signal line and zero line crossovers
Traders watch two crossovers. MACD above the signal line: the price’s momentum is turning up; it comes earlier and is wrong more often. MACD above zero: the EMA 12 has crossed above the EMA 26, so the short-term trend has turned up; it comes later.
On the same chart, MACD only crosses above zero on candle 22, with the price closing at 97.99, about 6.9% above the low. The signal line crossover came sooner, but it is also easier to fool.
| What you see | What it means | When it comes |
|---|---|---|
| MACD crosses above signal | momentum turning up | early |
| MACD crosses above zero | EMA 12 has crossed above EMA 26 | later |
| MACD crosses below signal | momentum turning down | early |
| MACD crosses below zero | EMA 12 has crossed below EMA 26 | later |
All four are worked out from averages of past prices. None of them appears before the price has moved.
Why MACD lags and when it gives false signals
MACD is built from three exponential averages: the EMA 12, the EMA 26 and a 9-day EMA of the difference. Every average lags, so MACD reacts after the price too. When the market has no clear trend, the lines cross again and again while the price goes nowhere.
Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: StockCharts ChartSchool (MACD - Moving Average Convergence/Divergence Oscillator: Gerald Appel, late 1970s; the 12, 26, 9 formula; signal and zero line crossovers; false signals). The charts are teaching diagrams, not real prices.