What Is MACD?
MACD is a trend-following momentum indicator showing the relationship between two exponential moving averages. The MACD line, signal line, and histogram reveal trend strength and direction.
Definition
MACD (Moving Average Convergence Divergence) is calculated by subtracting the 26-period EMA from the 12-period EMA. The result is the MACD line. A 9-period EMA of the MACD line is the signal line. When the MACD line crosses above the signal line, it's a bullish signal; crossing below is bearish.
The histogram shows the distance between the MACD line and the signal line — positive bars mean MACD is above signal (bullish momentum), negative bars mean below (bearish momentum). Widening bars indicate accelerating momentum; shrinking bars suggest a potential reversal.
MACD is best used in trending markets. In choppy, range-bound markets, MACD generates many false signals. Traders often combine MACD with RSI or price action confirmation before acting on crossovers.
Real-World Example
A stock's MACD line has been below the signal line for weeks (bearish). Then the MACD line crosses above the signal line with the histogram turning positive — a classic bullish MACD crossover. A trader might use this as a trigger to buy, especially if confirmed by the stock holding above its 50-day moving average.
Why It Matters
MACD is one of the most versatile indicators, working as both a trend-following and momentum tool. Its histogram makes momentum shifts visually obvious, helping traders time entries and exits.
Get Glen’s Updates
Investing insights, new tools, and whatever I’m building this week. Free. No spam.
Unsubscribe anytime. I respect your inbox more than Congress respects property rights.
Frequently Asked Questions
What does a MACD crossover mean?
A bullish crossover (MACD line crosses above the signal line) suggests upward momentum is building and may signal a buy opportunity. A bearish crossover (MACD line crosses below signal) suggests downward momentum. Crossovers in the direction of the longer-term trend have higher reliability.
What is MACD divergence?
Like RSI divergence, MACD divergence occurs when price and MACD move in opposite directions. If a stock makes a new high but MACD's peaks are lower, momentum is diverging bearishly — a potential warning of a reversal.
What are the best MACD settings?
The default (12, 26, 9) is widely used and effective for daily charts. Some traders use faster settings like (5, 13, 6) for short-term trading or slower (19, 39, 9) for longer-term signals. Changing settings rarely improves results significantly — stick with the default.
Related Terms
Recommended Resources
Tools & books I actually use and recommend
SeekingAlpha Premium
Quant ratings, earnings transcripts, and the stock analysis community where I published 300+ articles.
Try SeekingAlphaA Random Walk Down Wall Street
Burton Malkiel's classic case for index investing. The book that convinced millions to stop stock-picking.
View on AmazonThe Little Book of Common Sense Investing
John Bogle's manifesto on why low-cost index funds beat everything else. Straight from the founder of Vanguard.
View on AmazonSome links above are affiliate links. I only recommend products I personally use. See my full disclosures.