MACD

Yaser Rahmati | یاسر رحمتی

Introduction

The MACD (Moving Average Convergence Divergence) is a popular technical analysis tool used by traders to identify potential buy and sell signals. It is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price.

Understanding MACD

Components of MACD

1. MACD Line: The difference between the 12-period EMA (Exponential Moving Average) and the 26-period EMA.

$$MACD \; Line=EMA_{12}−EMA_{26}$$

1. Signal Line: A 9-period EMA of the MACD line.

$$Signal \; Line=EMA_{12}(MACD \; Line)$$

1. Histogram: The difference between the MACD line and the Signal line.

$$Histogram=MACD \; Line−Signal \; Line$$

Moving Average Convergence Divergence

Interpreting MACD

Basic Signals

MACD Line Crosses Signal Line

• Bullish Signal: When the MACD line crosses above the Signal line, it suggests a potential buy signal.

• Bearish Signal: When the MACD line crosses below the Signal line, it suggests a potential sell signal.

MACD Above/Below Zero Line

• Above Zero Line: Indicates upward momentum.

• Below Zero Line: Indicates downward momentum.

Histogram

• Positive Histogram: Indicates that the MACD line is above the Signal line, suggesting bullish momentum.

• Negative Histogram: Indicates that the MACD line is below the Signal line, suggesting bearish momentum.

• Histogram Convergence/Divergence: Histogram bars getting closer to zero indicate a potential trend reversal.

Advanced Analysis

1. Divergence

   • Bullish Divergence: When the price makes a lower low, but the MACD makes a higher low, it suggests potential upward reversal.

   • Bearish Divergence: When the price makes a higher high, but the MACD makes a lower high, it suggests potential downward reversal.

2. MACD Zero Line Cross

   • Bullish Zero Line Cross: When the MACD line crosses above the zero line, it suggests that the momentum is turning bullish.

   • Bearish Zero Line Cross: When the MACD line crosses below the zero line, it suggests that the momentum is turning bearish.

MACD Trading Strategies

1. Basic MACD Crossover Strategy

Setup:

• Use the default MACD settings (12, 26, 9).

Rules:

• Buy Signal: Enter a long position when the MACD line crosses above the Signal line.

• Sell Signal: Enter a short position when the MACD line crosses below the Signal line.

• Exit: Close the position when the opposite crossover occurs.

MACD Crossover

Example:

• Buy when the MACD line crosses above the Signal line and hold until it crosses below.

2. MACD Histogram Reversal Strategy

Setup:

• Use the default MACD settings (12, 26, 9).

Rules:

• Buy Signal: Enter a long position when the histogram shifts from negative to positive.

• Sell Signal: Enter a short position when the histogram shifts from positive to negative.

• Exit: Close the position when the histogram changes direction.

Example:

• Buy when the histogram moves from below zero to above zero.

3. MACD Divergence Strategy

Setup:

• Use the default MACD settings (12, 26, 9).

Rules:

• Bullish Divergence: Look for buy opportunities when the price makes a lower low and the MACD line makes a higher low.

• Bearish Divergence: Look for sell opportunities when the price makes a higher high and the MACD line makes a lower high.

Example:

• Buy when bullish divergence is identified and confirm with a MACD line crossover above the Signal line.

MACD Divergence Strategy