The MACD indicator explained: signal line, histogram and divergence

MACD, short for moving average convergence divergence, is a momentum indicator developed by Gerald Appel in the late 1970s. It shows whether two exponential moving averages are pulling apart or coming together, which traders read as momentum building or fading.

How MACD is calculated

With the standard settings of 12, 26 and 9:

• MACD line = the 12-period EMA of closing prices minus the 26-period EMA
• Signal line = a 9-period EMA of the MACD line
• Histogram = the MACD line minus the signal line

When the faster average is above the slower one, the MACD line is positive, and it rises as the gap widens. The histogram measures the distance between MACD and its own signal line, so it shrinks toward zero before the two lines cross. For how exponential averages differ from simple ones, see moving averages explained.

Three common ways to read it

Signal line crossovers

The MACD line crossing above its signal line is read as bullish momentum; crossing below, bearish. Crossovers are frequent, and in a sideways market many of them lead nowhere.

Zero line crossovers

The MACD line crosses zero when the 12- and 26-period EMAs cross each other. It's a slower signal that some traders use as a trend filter, for example only looking for buys while MACD is above zero.

Divergence

Bearish divergence is when price makes a higher high but MACD makes a lower high, suggesting the push behind the move is weakening. Bullish divergence is the mirror image. Divergence can persist for a long time in a strong trend, so it's a reason to tighten risk rather than, on its own, a reason to trade against the trend.

Limits to keep in mind

• It lags. Every input is an average of past prices, so MACD confirms moves after they've started.
• Readings aren't comparable across markets. MACD is measured in price units, so a reading on USD/JPY looks nothing like one on EUR/USD. Unlike the RSI, it has no fixed overbought or oversold levels.
• Settings change everything. Shorter settings react faster and give more false signals. Whatever you choose, test it before trading it.

MACD works best as one piece of evidence among several. A crossover in the direction of the higher time frame's trend, near a level you had already marked, means more than a crossover in the middle of a range.