Lesson 4 of 6 · 6 min

MACD

MACD (Moving Average Convergence Divergence) is an indicator developed by Gerald Appel in the late 1970s. There is nothing new in it: it is three lines derived from two EMAs. Once you know that, it stops being mysterious.

• MACD line = EMA12 − EMA26.
• Signal line = EMA9 of the MACD line itself.
• Histogram = MACD line − signal line.

What the lines mean

• A zero-line crossing means that EMA12 has crossed EMA26. Nothing more, nothing less; it is the usual moving average crossover.
• A signal-line crossing shows that the MACD is currently above or below its own average. It happens more often and earlier, but with more false signals.
• The histogram is the difference between those two lines, so it describes the speed of change in the gap between the averages. That is why it turns before the line does, but also errs more often.

Connection to the portal

The portal does not calculate MACD. The indicators lab does not show it either, so you will view it on the exchange chart, where it is almost always available with the default settings 12, 26, 9. Those settings are just a convention, not a constant of nature.

The portal does, however, use a very similar idea. Its gap between EMA20 and EMA50 is also a difference of two averages, just expressed in percent and with slower periods. Once you understand one, you understand the other. If you display MACD and the gap side by side, they will often tell the same story, which is yet another proof that indicators built from the same closes must not be counted as independent confirmations.

Limitations in a sideways market

When the price sits in a range, EMA12 and EMA26 walk around each other, the MACD circles around zero, and the signal line is crossed constantly. The rule “buy on a signal-line crossing” then produces a string of losses, just like a plain average crossover. The same remedy as before helps: a regime filter, or waiting for a stronger condition, such as ADX above a threshold.