When MACD crosses the baseline, it basically means that we have had a moving average crossover. If you still remember, the MACD line is the difference between the short term moving average and the long term moving average. If it’s zero, it means that both moving averages show the same reading.

The MACD, short for Moving Average Convergence Divergence, is a commonly used technical indicator that consists of the MACD line and a signal line. We introduce people to the world of trading currencies, both forex compounding calculator fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey.

1. The MACD is widely used and considered reliable by many traders for identifying trends and momentum.
2. A narrowing of the difference line (i.e., when the bars decrease) illustrates the potential for a crossover.
3. This means that when MACD and price lines are in divergence, then the investor should expect a long term price reversal in the price of an asset.
4. Convergence happens when two moving averages move toward one another, while divergence occurs when the moving averages move away from each other.
5. Skilled technical analysts look at a range of other metrics, such as volume and the relative strength indicator, when producing a price forecast.
6. MACD is arguably the most popular, but many different indicators are used to identify divergence.

Is there a better indicator than MACD?

Convergence between the two means momentum and price action are in sync. Downward or upward turns in the MACD histogram towards the zero line always precede MACD crossover signals. A MACD histogram’s vertical bars above and below the zero centerline visually indicate positive and negative momentum. Crosses above and below the centerline represent the same information as positive and negative crosses of the signal line on a MACD line chart.

Above you see how the RSI came from below 20, and how the MACD cross confirmed alpari forex broker review the imminent swing to the upside! As you see, once we spotted that the MACD line is too far from the signal line, there was a reversion of the trend. Two times, you see how the MACD line deviates from the Signal line, and how that is followed by a reversion back to the signal line. In the screenshot below, the market was in a strong uptrend initially. In this article, we focus on the MACD and the signal line in particular.

Moving Averages

The middle chart is a MACD line and histogram, centered around a baseline. Generally, when the MACD line crosses above the signal line, it’s considered a bullish signal, and when it crosses below, it’s bearish. The distance between the MACD and signal lines can also indicate the strength of the trend.

Calculating the MACD Line and Signal Line

Previously, traders traded stocks using the ‘centerline’ approach, which involved drawing a line at point 0 to distinguish between positive and negative areas. When the MACD line crossed below the centerline, it signaled a divergence between the two averages. When this occurred, traders assumed there was rising momentum and looked for buying opportunities.

The chart above depicts Wells Fargo’s (WFC) daily price chart data from April 2020 to June 2021. In November 2020, we can see that the RSI reading has risen above 70 and that the MACD has turned positive. Both these indicators measure momentum in the market, but because they assess distinct parameters, they may produce opposite results.

One reason traders frequently lose with this setup is that they enter a position on a signal from the MACD but exit it based on the movement in price. Remember, price is the ultimate indicator, with momentum indicators (the MACD histogram is a price derivative and not the price itself) only manipulating price data. Therefore, it is recommended to use price action to assist with trading decisions when using the MACD. Stochastic indicators are another type of key indicators in technical analysis. While the MACD relies on moving averages, stochastic indicators use a formula based upon current stock prices along with their highest high prices and lowest low prices in the recent past. MACD works perfectly when there are clear uptrends and downtrends in stock price movements.

In the image below you see How to buy crypto with apple pay a bearish crossover high up in the positive territory of the MACD indicator, followed by a bullish crossover in negative territory. This is because a trend reversal is thought to be more likely to occur when the security has moved in one direction for some time. Thus, when the MACD line is below zero, price has been trending down for enough time for a trend reversal to be likely, and the other way around. Indicators can be a great addition to your trading since they provide objective and easy-to-interpret information. Especially for trend traders, the MACD can be a helpful indicator because it analyzes trends and momentum effectively.

Example of MACD Histogram

That means that we will have to adjust our threshold values to 20 for oversold conditions, and 80 for overbought conditions. The third component will be a bullish divergence in the stochastic indicator. A bullish stochastic divergence is when the price is making new lows, while the stochastic at the same time performs higher lows. When it comes to trading strategies, there are as many variations of strategies as there are traders.

For example, turns in the MACD signal line near areas of support or resistance confirm potential reversal areas. Or, pairing the MACD with the Money Flow Index (MFI) confirms price momentum with an increase in volume. The default 12, 26, and 9 settings of the MACD can be adjusted to create more or fewer signals from the indicator. Shorter values generate more signals, while longer values create fewer signals.