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MACD Indicator — Momentum Shifts Explained
MACD combines a MACD line and a signal line. A crossover up hints at bullish momentum, a crossover down at bearish — with the usual caveats of a lagging tool.
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What MACD is
MACD (Moving Average Convergence Divergence) measures shifts in momentum. It has three parts:
- MACD line: the 12-period EMA minus the 26-period EMA.
- Signal line: a 9-period EMA of the MACD line.
- Histogram: the MACD line minus the signal line, drawn as bars.
Reading the signals
- Bullish crossover: the MACD line crosses above the signal line, and the histogram turns from negative to positive — momentum is shifting up.
- Bearish crossover: the MACD line crosses below the signal line, and the histogram turns negative — momentum is shifting down.
Divergence
Like RSI, MACD can diverge from price:
- Bullish divergence: price makes a lower low but MACD does not — a warning the downtrend may be tiring.
- Bearish divergence: price makes a higher high but MACD does not — a warning the uptrend may be tiring.
Divergences often precede stronger reversals.
Common mistakes
- Whipsaws. In a sideways market MACD crosses back and forth, generating repeated false signals.
- It lags. MACD reacts after price has moved, so entries and exits based on it are inherently a little late.
- Using it alone. Confirm with moving averages, RSI or key levels.
MACD vs RSI
MACD is slower and better for confirming a trend; RSI is faster and better for spotting overbought/oversold conditions for entries. Many traders use them together — MACD for the trend, RSI for timing.
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