Technical Analysis · Intermediate · 5 min

MACD

You can explain the three parts of the MACD, read signal-line crossovers and the histogram, and explain why the MACD lags.

One idea, three parts

Under many charts sit two wavy lines and a row of bars that grow and shrink around a zero line. It looks technical, and it often appears in trading videos as if it held a secret.

The MACD is built from one simple idea: comparing a fast moving average with a slow one. Once that idea is clear, all three parts make sense, and so do their limits.

Fast minus slow

The MACD, short for moving average convergence/divergence, was developed by Gerald Appel in the late 1970s. It has three parts:

The MACD line: the 12-period EMA minus the 26-period EMA. When the fast average pulls away above the slow one, the MACD rises. When they come together, it falls toward zero. Below zero, the fast average is below the slow one.
The signal line: a 9-period EMA of the MACD line. It is a smoothed, slower version of the MACD.
The MACD histogram: the MACD line minus the signal line, drawn as bars. Above zero, the MACD is above its signal line.

What traders read from it:

Crossovers of the MACD and the signal line are the most common signals. A cross upward is read as rising momentum, a cross downward as fading momentum.
The zero line: a MACD above zero means the fast average is above the slow one, roughly an uptrend in the moving average sense.
The histogram: when it shrinks, the MACD is losing ground on its signal line. As StockCharts notes, the histogram tends to turn before the lines cross.

The settings 12, 26 and 9 are conventions from daily charts, not optimized values. And because the MACD stacks averages on top of averages, each layer adds delay.

Five candles after the high

The fictional chart shows a sideways phase near 100, a rise to 112.35 and a decline to 104. Below it, MACD (12, 26, 9). The signal line first appears on candle 34, after 26 plus 9 periods of data minus one.

The histogram is largest around candle 36 and begins to shrink after candle 39, the candle with the price high at 112.35.
The MACD line crosses below its signal line on candle 44, at a close of 110.81, five candles after the high.
The MACD drops below zero on candle 55, at a close of 105.31.

Each step described the fading of the rise accurately, after the fact. A trader using the crossover as an exit would have given back about 1.2 points from the high close. A trader waiting for the zero line would have given back almost 7.

Common mistakes

Treating crossovers as predictions. They confirm momentum shifts with a delay.
Using MACD in ranges. Lines cross back and forth without meaning much.
Optimizing the settings to past data. The best-looking values rarely stay the best.
Comparing MACD values across assets. The MACD is in price units, so values differ by price level.

The takeaway

The MACD tracks the gap between a fast and a slow average, with a signal line and a histogram. It shows momentum, with a delay.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the candle on which the MACD line crossed below its signal line.

Tap the chart.

On candle 44, the MACD line (2.49) fell below the signal line (2.52), and the histogram turned negative. The price high had come five candles earlier.
2What is the MACD line?

When the faster average pulls away from the slower one, the gap and the MACD grow. When they converge, it shrinks.
3What does the histogram show?

A shrinking histogram means the MACD is losing ground on its signal line, which often happens before the lines cross.
4Why do MACD crossovers usually come after price turns?

The MACD stacks averages on averages: two EMAs and an EMA of their difference. Each layer adds delay.

of 4 correct.

Sources

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