MACD

The three parts

• MACD line: the 12-period EMA minus the 26-period EMA. Above zero, the short average is above the long, which is an uptrend in momentum terms.
• Signal line: a 9-period EMA of the MACD line, which smooths it.
• Histogram: MACD line minus signal line, drawn as bars. Growing bars mean momentum is accelerating; shrinking bars mean it is fading.

Reading it

A MACD line crossing above the signal line is a bullish momentum crossover; crossing below is bearish. The MACD line crossing the zero line is a slower signal that the two averages have crossed on the price chart. Divergence between price and the MACD line works the way RSI divergence does. Because MACD is built from moving averages, it inherits their lag, and its crossovers whipsaw in ranges.

Using it well

The most defensible use is as confirmation: take a structure-based entry in the trend direction only when the histogram is turning in that direction too. A shrinking histogram against your position is a reason to tighten the stop. Trading every crossover is a reliable way to lose money in a sideways market.

Settings

12, 26 and 9 are the defaults and there is no reason to change them. Faster settings produce more signals and more noise; slower ones lag further.

Key takeaways

• MACD is the difference between two EMAs, with a signal line and a histogram.
• Crossovers and the zero line show momentum direction; the histogram shows acceleration.
• It lags and whipsaws in ranges.
• Use it to confirm structure, not to replace it.