How to Read MACD Indicator Explained OneUp Trader Blog

While it is an effective indicator on its own, combining MACD with other technical indicators can provide traders with a more comprehensive analysis of the market. In this section, we will discuss some of the ways that MACD can be used in conjunction with other technical analysis tools to improve trading decisions. Zero Line crossovers strengthen MACD signals by focusing on the MACD line’s movement above or below the zero line, indicating a shift in momentum. In general, these crossovers don’t give off as many false signals. They work best when used with tools that confirm trends, like Exponential Moving Averages (EMAs) or price action analysis.

An exponentially weighted moving average tends to have more significant reactions to recent price changes than a simple moving average (SMA). The chart below shows pound sterling in an uptrend against the Japanese yen. To the left of the chart you’ll see a double top forming, where the second top is higher than the first. However, if you look directly below to the MACD, you’ll see momentum is weakening. So even though price is climbing we can see from the divergence between price and momentum that a move to the downside can be anticipated. Adding volatility measurements, such as Bollinger Bands, can further refine your MACD strategy.

• A falling histogram below zero suggests growing bearish pressure.
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• Regularly review your performance and make adjustments as needed to maintain peak trading potential.

Confirming the trend

The MACD can help you identify both the signal line crossover and the zero line crossover with relatively high accuracy. However, it is worth noting that the crossovers can produce multiple false signals per trading session, especially when it comes to highly-volatile assets. The MACD is a trend-following momentum oscillator applied to the price of a particular security using two moving averages to attempt to indicate the formation of a new trend.

MACD Indicator Definition & Examples

The MACD line is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA of a security’s closing price. This line represents the asset’s underlying momentum, reflecting the relationship between its short-term and long-term price movements. A positive MACD line suggests upward momentum, while a negative value implies downward momentum. For entry signals, define exactly what constitutes a valid MACD signal. Is it simply when MACD crosses above the signal line, or do you require additional confirmation?

The top arrow and text (pointing to the left) explains the MACD is calculated using 12- and 26-period EMAs with a 9-period signal line. The other arrows and text point to the MACD line, the MACD signal line, and the difference line histogram. Traders use this indicator to help determine buy or sell signals and to confirm or deny their trade thesis. That’s why it’s risky to treat every crossover as a buy or sell signal on its own. It’s up to you to figure out what direction the market was already moving.

Part of the reason why technical analysis can be a profitable way to trade is because other traders are following the same cues provided by these indicators. Convergence relates to the two moving averages coming together. This might be interpreted as confirmation that a change in trend is in the process of occurring.

• The stronger the momentum, either up or down, the less reliable the signal.
• One of the great things about being an individual trader is developing our skills, abilities, and opinions about market analysis and trade strategies.
• The MACD is one of the most commonly used technical indicators.

A bullish signal line crossover can be observed when the how to read the macd MACD line crosses above the signal line. On the contrary, a bearish crossover occurs when the MACD line crosses below the signal line. In this article, you’ll learn about the Moving Average Convergence Divergence indicator, or MACD for short. It’s one of the most popular and widely used technical analysis tools.

Axi makes no representation and assumes no liability with regard to the accuracy and completeness of the content in this publication. In both cases, it is crucial to trade clear and unambiguous divergences, reducing the risk of false signals. A false positive divergence usually happens when the price of a security moves sideways.