Using the MACD Indicator

The MACD Indicator is a popular momentum indicator that uses moving averages to form an oscillator by subtracting the longer term moving average from the shorter term moving average.

There are two types of moving averages, but the type of moving average this indicator uses is called an Exponential Moving Average.

Once the calculations are done behind the scenes by your charting program, the resulting technical indicator displays below a stock chart (most of the time, it can be below or above) and fluctuates above and below a centerline set at zero.

The standard setting when using this indicator is to use a 12 day EMA (Exponential Moving Average) and a 26 day EMA along with a signal line, represented by a 9 day EMA which is plotted along with the MACD line.

The signal line, or trigger line, is called such because it can be used as a signal, or trigger, when the MACD line crosses the signal line.

The MACD Indicator is shown below the actual stock chart. The legend for the indicator shows that the black line is the MACD line, and that it is using the 12 and 26 day EMA along with the 9 day signal line, which is shown as a red line in the same section below the actual stock chart.

On the stock chart itself, I have shown the actual 12 and 26 day EMA lines as shown by the chart legend in the top left corner. Remember, the MACD uses the difference between the two and the chart shows the actual moving averages which si why they cross in different places.

You can adjust the moving averages used by the MACD in the charting program to test out using various ones by changing the 12 and 26 entries.

MACD Indicator Example

Bullish MACD Signals

  • Positive Divergence: Occurs when the MACD indicator line rises and forms a higher low but the stock continues to decline forming a lower low.
  • Bullish MACD Crossover: Occurs when the MACD line crosses above it's signal line from below.
  • Bullish Centerline Crossover: Occurs when the MACD line crosses above the centerline (zero) from below.

Bearish MACD Signals

  • Negative Divergence: Occurs when the MACD indicator line declines and forms a lower high but the stock continues to rise forming a higher high.
  • Bearish MACD Crossover: Occurs when the MACD line crosses below it's signal line from above.
  • Bearish Centerline Crossover: Occurs when the MACD line crosses below the centerline (zero) from above.

Below is another example showing a Positive Divergence and Bullish MACD Crossover back in late February 2009 and a Negative Divergence with a Bearish Divergence in early June 2009:

MACD Indicator

Things to remember when using technical indicators:

  • While they can be reliable to an extent, they don't work every single time.
  • You can combine multiple indicators as you wish to provide greater accuracy for your entry and exit signals.
  • You can combine multiple signals from the same indicator for your entry and exit triggers.
  • Always practice using indicators with various examples to see what works with your personal trading plan.
  • Remember to use proper risk and money management techniques in case the original signal proves to be wrong.

See an example of an Intraday Double Top with MACD Indicator 07/06/2009:




Return From "MACD Indicator" To "Technical Analysis"


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