FOREX - What Is MACD Indicator and How It Works?

The Moving Average Convergence Divergence (MACD) is a technical indicator that measures a relationship between two exponential moving averages. The MACD is displayed as a MACD line (blue line), a signal line (red line), and a histogram (black line) that shows the difference (i.e. divergence) between these two lines. The MACD line is the difference between two exponentially leveled moving averages – usually 12 and 26-period.

The signal line is generally a 9-period exponentially smoothed average of the MACD line. These MACD lines are fluttering around the zero line. This gives the MACD the characteristics of an oscillator that signals overbought and oversold zones when the indicator moves above or below the zero line, respectively.

What does the MACD measure？

The MACD measures momentum or trend strength using the MACD line and the zero line as reference points:

• When the MACD crosses above the zero line, it qualifies as bullish confirmation or the uptrend.

• When the MACD crosses below the zero line, it qualifies as bearish confirmation or the downtrend.

Additionally, when two MACD lines intersect, as shown in the chart below, traders can use it as a signal to place their buy or sell orders:

• When the MACD line crosses above the signal line, traders use it as a BUY signal.

• When the MACD line crosses below the signal line, traders use it as a SELL signal.

How to calculate the MACD？

Most charting platforms offer the MACD indicator and calculate it using the default periods mentioned above. The formula below breaks down the various components of the MACD to make the calculation easier for traders.

• MACD Line: 12-Period EMA – 26-Period EMA

• SIGNAL Line: 9-Period EMA

• HISTOGRAM: Difference between the MACD line and the signal line

The MACD histogram represents the difference between two moving average lines. The MACD histogram oscillates above and below the zero line, where the MACD and the signal line intersect. When the MACD line is above the signal line, the histogram will have a positive value.

Conversely, when the MACD line crosses below the signal line, the histogram will be plotted below zero with a negative value. A zero value of the histogram indicates that the two moving averages crossover, which provides buy/sell signals.