MACD Line - An indicator that helps identify trend and price momentum

What is MACD and Why Is It Important in Trading

The MACD line is a hybrid indicator that performs two functions simultaneously - indicating (Trend) and measuring (Momentum) of price movements. It was developed by Gerald Appel in the late 1970s by subtracting two (Exponential Moving Averages).

This indicator is popular among traders because it provides straightforward signals, can be customized to individual trading styles, and is applicable across all timeframes.

How Many Parts Does the MACD Line Have?

1. Main MACD Line

The MACD line is derived by subtracting the (12-day) EMA from the (26-day) EMA, measuring the distance between two moving averages.

How to read:

• When MACD > 0 (above the Central Line) = Uptrend; short-term average price is higher than the long-term
• When MACD < 0 (below the Central Line) = Downtrend; short-term average price is lower than the long-term
• The slope of the MACD line indicates strength - steeper slope means a stronger trend

2. Signal Line (Signal)

The Signal Line is the (9)-period EMA of the MACD line itself, used to clarify trend changes.

How to read:

• MACD > Signal Line and MACD > 0 = Clear bullish signal (Bullish)
• MACD < Signal Line and MACD < 0 = Clear bearish signal (Bearish)

The EMA(9) can be adjusted based on preference, e.g., EMA(5) or EMA(7), depending on whether faster or slower signals are desired.

3. Histogram (Bars)

The Histogram represents the difference (MACD - Signal Line), visualized as bars for clear change detection.

How to interpret:

• Histogram > 0 (positive) = Uptrend; larger positive indicates stronger momentum
• Histogram < 0 (negative) = Downtrend; larger negative indicates stronger momentum
• Histogram = 0 = critical point - price is in a trend reversal zone

Why Use EMA Instead of SMA

EMA (Exponential Moving Average) gives more weight to recent prices, making it more responsive to current price changes and signals. SMA (Simple Moving Average) weights all data equally.

Since price data is a time series, EMA is preferable for capturing market shifts more quickly.

How to Use MACD Lines for Different Trading Strategies

Method 1: Zero-Cross Strategy

The clearest signal, ideal for beginners.

Buy Signal:

• MACD line crosses above the Central Line (from negative to positive)
• Price shifts from downtrend to uptrend

Sell Signal:

• MACD line crosses below the Central Line (from positive to negative)
• Price shifts from uptrend to downtrend

Method 2: MACD Crossover Strategy

Provides earlier signals by monitoring MACD crossing the Signal Line instead of waiting for the Central Line.

Buy Signal:

• MACD just crosses above the Signal Line while still below 0
• Indicates weakening negative momentum; downtrend is ending

Sell Signal:

• MACD just crosses below the Signal Line while still above 0
• Indicates weakening positive momentum; uptrend is ending

Method 3: MACD Divergence

Detects conflicting signals - when prices make new highs/lows but MACD does not, signaling potential trend reversal.

Bullish Divergence (Buy Signal):

• Price makes new lows, but MACD does not
• Indicates weakening downward force; potential reversal to uptrend

Bearish Divergence (Sell Signal):

• Price makes new highs, but MACD does not
• Indicates weakening upward force; potential reversal to downtrend

Combining MACD with Other Tools

MACD + RSI

Use RSI to measure overbought/oversold conditions (Overbought/Oversold), with MACD confirming trend changes for higher accuracy.

MACD + Bollinger Bands

When Bollinger Bands contract (decreased volatility) and then break, MACD confirming a Zero Cross indicates significant trend change.

MACD + Price Breakout Patterns

When price breaks out of Triangle or Double Bottom/Top patterns, MACD confirming Zero Cross can reduce false signals.

Limitations of Using MACD

MACD is a Lagging Indicator - It signals after the actual price movement, especially with frequent Central Line crossovers, which may cause missed opportunities.

In choppy markets, MACD can generate false signals often. When using Crossover strategies, be cautious of whipsaws.

Therefore, do not rely solely on MACD. Complement it with other indicators like Support/Resistance, Volume, or other Moving Averages to improve accuracy.

How to Set Up and Adjust MACD on Trading Platforms

On most trading platforms (such as Mitrade):

1. Add Indicator → Search for MACD
2. Open Settings and adjust:
   • FastLength = short-term EMA (default 12)
   • SlowLength = long-term EMA (default 26)
   • SignalLength = EMA of MACD (default 9)

Adjustment tips:

• For faster signals = lower numbers (e.g., 10, 24, 7)
• For more reliable signals = higher numbers (e.g., 14, 28, 11)

Summary

The MACD line is a powerful tool for identifying trends and measuring momentum, but it is inherently lagging. Using it in conjunction with other tools enhances effectiveness.

Traders should experiment with different MACD settings and timeframes on demo accounts to understand its real-world operation before applying to live trading. Success depends on deep understanding of the tools, not just having good indicators.