How to Use the MACD Indicator

EnclaveFX Ltd
Jan 27, 2023

The Moving Average Convergence Divergence is preliminary a trend-trading indicator. It identifies overbought or oversold situations. It appears as two lines that oscillate without boundaries on the chart. In the MACD calculation, two EMAs are used, which consist of two moving average lines. These lines are fast and slow. Subsequently, a simple moving average is used to flatten the difference between the long and short moving averages. Consequently, traders see only two curves: a MACD line and a signal line; the difference between them is used as a basis for trading signals.

How this Indicator Works 

A MACD crossing above zero indicates bullish movement, while below zero indicates a bearish trend. Users of the MACD generally avoid trading or closing positions during trading ranges when the fast line crosses back and forth across the signal line. Traders should find a MACD that diverges from the price action after the crossover.

What is Moving Average Convergence Divergence (MACD)?

In Moving Average Convergence and Divergence, traders can see how a security's price is affected by two exponential moving averages. The MACD line derives from subtracting the 26-period EMA from the 12-period EMA. This calculation results in a MACD line. On top of the MACD line, a nine-day EMA is plotted to create a signal line, which can trigger a buy or sell. When the MACD line touches above the signal line, traders may purchase the security, and when it crosses below it, they may sell.

MACD vs. Relative Strength

A relative strength index indicates average price gains and losses over a specific period. Based on current prices, this index helps determine whether a market is overbought or oversold. In contrast, an oversold condition suggests that a top is emerging, or vice versa. In terms of MACD lines, they operate differently from RSIs and other indicator studies. MACD signals are compared to traders' past price movements in securities.

Limitations of MACD and Confirmation

Like other technical analysis tools, MACD has some limitations. Performance varies across assets and markets. Due to the lag in the signals, MACD is used with other devices because it is not accurate in lower time frames. The Best forex brokers use MACD indicators to predict the market.

Example of MACD Crossovers

If MACD falls below the signal line, it signals a time to sell. Conversely, if MACD rises above the signal line, it suggests a time to buy. Generally, crossovers are more reliable when they are aligned with the trend. When MACD crosses above its signal line within an uptrend, it is a bullish confirmation and indicates an uptrend.

Example of Divergence

MACD diverges when it forms highs or lows that exceed the price's corresponding highs and lows. MACD produces two rising lows in a bullish divergence corresponding to two falling lows. It is a valid bullish signal when there is still a positive long-term trend. The bullish divergences signal a change in a direction even when the long-term trend is negative, but this technique is less reliable than others. Accordingly, a price below the MACD signal line indicates that a sale is in order.

Example of Rapid Rises or Falls

MACD indicates that the security is overbought or oversold when it rises or falls. In many cases, investors use the MACD's histogram just as they would the MACD itself. It is also possible to identify crossovers, divergences, and rapid rises and falls on the histogram. Before deciding which is best in a given situation, experience with MACD and its histogram is needed quickly. Traders can combine this with the RSI or other technical indicators to verify whether a stock is overbought or oversold.


The MACD indicator produces a variety of signals and can serve as the basis of perfect trading. MACD and other technical analysis tools filter out false calls, including envelopes and ADX. MACDs are useful trading indicators used by the best online forex brokers.

The MACD indicator reacts to changes in price direction more quickly than recent data. Technical signals, such as the RSI or candlestick charts, should provide confirmation.