MACD (moving average convergence divergence)

MACD, developed by Gerald Appel in the late 1970s, measures how far a fast exponential moving average has pulled away from a slow one. With the standard settings it has three parts:

• MACD line: the 12-period EMA minus the 26-period EMA.
• Signal line: a 9-period EMA of the MACD line.
• Histogram: the MACD line minus the signal line, drawn as bars above or below zero.

When the MACD line is above zero, the faster average is above the slower one, which is another way of saying recent prices have been higher than older ones. When the histogram shrinks, momentum is fading even if price is still moving in the same direction.

Example

Illustrative numbers on a EUR/USD daily chart: the 12-day EMA is 1.0880 and the 26-day EMA is 1.0850. The MACD line is 0.0030 (30 pips). If the signal line is 0.0024, the histogram shows +0.0006. If over the next few days the MACD line falls to 0.0022 while the signal line is 0.0023, the histogram turns slightly negative: a "bearish crossover" in chart language. Note that the values are in price units, so MACD readings on different pairs cannot be compared directly.

Common misconception

Crossovers are often presented as buy and sell signals. Because MACD is built from moving averages, it lags price, and in sideways markets it crosses back and forth repeatedly. Many traders use it to judge whether momentum agrees with the trend rather than as a trigger on its own, and look for divergence between MACD and price. Our guide to RSI and MACD covers both indicators and the ways they are misused.