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In contrast, a negative MACD is shown when the MACD line crosses below the centerline, meaning that the 26-day average is higher than the 12-day. In other terms, a positive MACD line suggests a stronger upside momentum, while a negative one may indicate a stronger drive to the downside. Keep in mind that both centerline and signal line crossovers may happen multiple times, producing many false and tricky signals – especially in regards to volatile assets, such as cryptocurrencies. In a strong uptrend, the main line is above the zero level and is moving up. In this case, the short-moving average is higher than the long-moving average, and the divergence exists between them.

1. A slow-moving average with a longer period (EMAl) is subtracted from the fast-moving average with a smaller period (EMAs).
2. The MACD indicator provides strong entry signals when the MACD line crosses the signal line in the same direction as the existing trend.
3. A positive MACD indicates upward momentum and means the average price of the last 12 periods is higher than the average price of the previous 26 periods.
4. Either indicator may signal an upcoming trend change by showing divergence from price (price continues higher while the indicator turns lower, or vice versa).
5. By understanding the nuances of the MACD, traders can leverage its signals to make quick, informed decisions.

Understanding Smart Money Concepts (SMC) in Trading: A Comprehensive Guide

An approximated MACD can be calculated by subtracting the value of a 26 period Exponential Moving Average (EMA) from a 12 period EMA. The shorter EMA is constantly converging toward, and diverging away from, the longer EMA. Support and resistance levels along with volume analysis can provide further confirmation of the MACD’s signals. Experiment with different settings on your charts to find what works best for your trading style. Try our popular premium stock charting software, with proprietary trading tools and powerful stock screens. For example, turns in the MACD signal line near areas of support or resistance confirm potential reversal areas.

The zero line helps traders quickly determine whether an asset is in an overall uptrend or downtrend. A common MACD histogram strategy is to look for divergence between the price of an asset and the MACD histogram. For example, if the price is making higher highs, but the histogram is making lower highs, it could signal a potential reversal. Next, we have the signal line, which is usually displayed in orange. The signal line is simply a 9-period simple moving average (SMA) of the MACD line. Because it’s a moving average of the MACD line, it smooths out the data and gives a more clear indication of when trends might be changing.

How to Interpret the MACD on a Trading Chart

Convergence between the two means momentum and price action are in sync. Downward or upward turns in the MACD histogram towards the zero line always precede MACD crossover signals. The MACD can be calculated on any timeframe from intraday, daily, weekly, or other data points. Values above zero are typically bullish and indicate an uptrend, while MACD values below zero indicate a downtrend.

It consists of an MACD line, a signal line, and a histogram that provides a visual representation of the difference between both lines. From highlighting existing trends to pointing out potential reversals, analyzing the MACD’s components may reveal valuable insights into the market’s momentum. The MACD indicator is a versatile and powerful tool for traders in various markets. Whether you’re trading stocks, forex, or crypto, the MACD line, signal line, and histograms can help you better understand market momentum and potential trend reversals. The period may be configured in different ways (minutes, hours, days, weeks, months), but this article will focus on daily settings.

The histogram is positive when the MACD is above its nine-day EMA and negative when the MACD is below its nine-day EMA. The existing trend signal can be confirmed by looking at the MACD signals. If the histogram is above the baseline during an uptrend, it means that the uptrend is confirmed.

Therefore, this can give a trader the chance to potentially see signs that a crossover might take place. In practice, the crossover signals from the MACD divergence should be supplemented with other technical and fundamental analysis, and at the very least some basic price analysis. For instance, to act on the bullish MACD crossover, when the MACD rises above the signal line, we could look for further confirmation such as the asset price breaching a resistance level. Traders could use these indicators in combination with the MACD indicator to increase the probability of accurate trading signals.

This indicator means selling pressure (supply) is running out of steam. Technically, you don’t get a buy signal until the bars are actually over the zero line, but it’s up to you whether to act in anticipation that it will cross the line. As we mentioned earlier, 12-period and 26-period values are how to read the macd the generally used settings to calculate the MACD. Changes in the time periods used for calculation can be made to accommodate a trader’s specific trade goals or their particular style of trading. When a stock, future, or currency pair is moving strongly in a direction, the MACD histogram will increase in height.

How to trade with MACD indicator

1. You can even use MACD in your automated trading strategies with this decision recipe.
2. If prices change rapidly, the histogram bars grow longer as the speed of the price movement—its momentum—accelerates and shrinks as price movement decelerates.
3. However, if you have opened a long position and the MACD histogram shows that there has recently been a new swing low, it signals you to exit the long trade position due to an expected downtrend.
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6. Similarly, if the MACD histogram is below the zero line, it implies that the MACD is below the MACD signal line.

The histogram helps traders visualize the momentum and strength of a move. The MACD is a relatively simple indicator, easy to comprehend, appeals to intuitive logic and therefore resonates well with most traders. It can be a powerful tool if used effectively, especially for assessing the strength and momentum​​ of trends, and consequently to predict their continuance and potential reversal.

Both methods can help traders identify potential flaws and optimise the strategy for a potential better performance. Classed as a momentum indicator, the MACD is based on the relationship between two moving price averages (MA) of the same asset’s price. Conceived by investment manager Gerald Appel in 1979, the MACD has risen to become one of the most popular technical trading indicators in use today. Some traders will look for bullish divergences even when the long-term trend is negative because they can signal a change in the trend, although this technique is less reliable.

This involves not only recognizing the basic MACD line and signal line crossovers but also understanding the implications of the histogram’s changes. However, when the MACD value is lower than its previous nine-day average and the histogram is below its baseline, it indicates that there has been a decline in the market momentum. Any peak in the histogram indicates a bearish momentum losing strength, and a trough represents a bullish momentum losing strength and results in a trend reversal. In the graph, the letter ‘T’ represents when there is a peak (or top) in the market.