MACD - Moving Average Convergence/Divergence

SETUP

• MACD Formula= 12-Period EMA − 26-Period EMA

• MACD is best used with daily periods, where the traditional setting of 26/12/9 days is the default.

• MACD triggers technical signals when the MACD line crosses above the signal line (to buy) or falls below it (to sell).

• Example: If the price is making higher highs while the MACD is making lower highs, it can signal a potential reversal in the price trend.

CROSSOVERS

• When the MACD line crosses above the signal line, it generates a bullish signal, indicating that it may be a good time to buy.

• When the MACD line crosses below the signal line, it generates a bearish signal, indicating that it may be a good time to sell.

HISTOGRAM

• Created by subtracting the signal line from the MACD line.

• Provides a visual representation of the difference between the two lines and helps traders gauge the strength of the trend. 

• When the histogram is above the zero line and increasing, it suggests bullish momentum. 

• Conversely, when it is below the zero line and decreasing, it suggests bearish momentum.

CAUTIONS

• Produces many false signals and whipsaws in a sideways market environment.

• Because it's based on moving averages, it's a lagging indicator.