Charts and indicatorsUpdated 2 min readBy the FXNOD team
MACD indicator explained: lines, histogram and signals
MACD, the Moving Average Convergence Divergence, is the difference between a 12-period and a 26-period exponential moving average. A 9-period average of that difference is the signal line, and the histogram shows the gap between the two. MACD above zero means the faster average is above the slower one: momentum is up. It lags the price.
The three parts
| Part | Formula | Shows |
|---|---|---|
| MACD line | 12-period EMA minus 26-period EMA | Direction and strength of momentum |
| Signal line | 9-period EMA of the MACD line | A smoothed MACD to compare against |
| Histogram | MACD line minus signal line | Whether momentum is building or fading |
The signals people use
- Signal-line cross: MACD crossing above the signal line is read as bullish, below as bearish.
- Zero-line cross: MACD crossing above zero means the 12 EMA has crossed above the 26 EMA.
- Histogram: bars shrinking towards zero show a move losing strength before the lines cross.
- Divergence: the price makes a new high and MACD does not.
Settings
The standard is 12, 26 and 9. Shorter settings react faster and give more false signals. There are no best settings: tuning them until the past looks perfect is curve fitting.
Where it fails
- Sideways markets: the lines cross back and forth around zero and every cross loses.
- Lag: it is built from averages of averages, so it confirms a move after part of it has gone.
- Divergence can persist through a long trend before anything turns.
- Its values are in price units, so they cannot be compared between markets.
Using it well
Treat MACD as a description of momentum, combined with trend and levels. Decide whether the market is trending first: MACD crossovers suit trends and should be ignored in a range. On a synthetic index the lines calculate correctly and say nothing about the next move.
In FXNOD
MACD is one of the indicators a Bot Forge bot can use to decide which side to take. An indicator needs enough candles before it has a value, so the bot waits for one.
Questions people ask
- What does MACD stand for?
- Moving Average Convergence Divergence: it measures how two moving averages come together and move apart.
- What are the best MACD settings?
- The default 12, 26, 9 is the most widely used. Other settings trade speed against false signals; none is best.
- Is MACD a leading indicator?
- No. It is calculated from past prices and lags them.
Put it on a chart
Trade Pilot's chart has moving averages, RSI and Bollinger Bands, and a bot in Bot Forge can use indicators to choose its side. Try both on your Deriv demo account.
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