What is MACD? How to read the MACD indicator

MACD — Moving Average Convergence Divergence — was developed by Gerald Appel in the late 1970s. It tracks the distance between a fast and a slow exponential moving average (EMA). When the fast average pulls away above the slow one, upside momentum is building; when the two converge, momentum is fading; when the fast one drops below, momentum has turned down.

That makes MACD a hybrid: it follows trends like a moving average, and like an oscillator it shows whether a move is accelerating or slowing down.

The indicator has three parts, all built from closing prices with the standard 12/26/9 settings:

MACD line   = EMA(12) − EMA(26)
Signal line = EMA(9) of the MACD line
Histogram   = MACD line − signal line

An EMA gives more weight to recent prices than a simple average does, so MACD reacts faster than a comparison of two simple moving averages would. The settings are a convention rather than a law of nature, but they are by far the most common and they are what our charts use.

Say a stock's 12-day EMA is 105 and its 26-day EMA is 102. The MACD line is 105 − 102 = +3. If the signal line is at 2.4, the histogram is 3 − 2.4 = +0.6: MACD is above its signal line and the bars are positive, so upside momentum is in control. If over the next few days the histogram shrinks from 0.6 to 0.2, momentum is fading even though the price may still be rising.

The typical signals: a bullish crossover when the MACD line crosses above the signal line (bearish when it crosses below); a zero-line cross when the 12-day EMA moves above or below the 26-day EMA, which confirms a change of trend; and divergence, when price makes a new high but MACD makes a lower high.

MACD is made of moving averages, so it lags: by the time a crossover appears, part of the move has often already happened. In sideways, choppy markets the lines cross back and forth and produce a string of losing signals.

MACD is measured in price units, not percentages. A reading of 3 on a $100 stock is large; on a $3,000 stock it is noise. Don't compare MACD levels between assets, or between very different price eras of the same asset — compare the shape of the lines and the crossovers instead. And rather than trading every crossover, combine it with the trend, support and resistance, and risk management.

RSI and MACD are often paired. RSI is bounded between 0 and 100 and is better at spotting stretched conditions; MACD is unbounded and better at showing the direction of a trend and whether it is speeding up. A common approach is to take direction from MACD (or its zero line) and timing from RSI within that direction.