What is MACD?
Learn how the MACD indicator helps you spot trend changes and momentum shifts before they happen.
Quick Answer
MACD (Moving Average Convergence Divergence) shows the relationship between two moving averages. It helps spot trend changes and momentum shifts. When the MACD line crosses above the signal line = bullish (buy signal). When it crosses below = bearish (sell signal). Think of it like a traffic light for trends—green means go, red means stop.
MACD Components (Simplified)
1. MACD Line (Fast Line)
The main line that moves up and down. Shows the difference between recent prices and older prices. When it rises = bullish momentum. When it falls = bearish momentum.
2. Signal Line (Slow Line)
A smoother, slower-moving line that the MACD line crosses. Acts as a trigger for buy/sell signals. Think of it as the "confirmation line."
3. Histogram (Bars)
Vertical bars showing the distance between MACD and signal line. Bars growing = momentum increasing. Bars shrinking = momentum weakening.
How to Read MACD Signals
Bullish Crossover (Buy Signal)
When MACD line crosses ABOVE signal line
↓
= Momentum shifting from bearish to bullish
↓
Signal: Consider buying or holding
Visual:
MACD line (blue) crosses ↗ above signal line (orange)
Histogram bars turn positive (green)
Bearish Crossover (Sell Signal)
When MACD line crosses BELOW signal line
↓
= Momentum shifting from bullish to bearish
↓
Signal: Consider selling or avoiding
Visual:
MACD line (blue) crosses ↘ below signal line (orange)
Histogram bars turn negative (red)
Real Trading Examples
Apple (AAPL) Bullish Crossover
Scenario: Apple trading at $150 after correction
MACD histogram shrinking (downtrend losing steam)
MACD line crosses above signal line
Histogram flips to positive
↓
Buy signal at $150
↓
Stock rallies to $165 over next 3 weeks
10% gain from catching the trend reversal early
Tesla (TSLA) Bearish Crossover
Scenario: Tesla at all-time high $300
MACD histogram shrinking (uptrend losing momentum)
MACD line crosses below signal line
Histogram flips to negative
↓
Sell signal at $300
↓
Stock drops to $250 over next 4 weeks
Avoiding 17% loss by heeding the warning
Advanced MACD Signals
1. Zero Line Crossover
When MACD line crosses above 0 = confirms new uptrend starting. When it crosses below 0 = confirms new downtrend starting.
MACD > 0 = Bulls in control
MACD < 0 = Bears in control
2. Divergence (Warning Signal)
Price makes new highs but MACD doesn't = bearish divergence (trend losing strength). Price makes new lows but MACD doesn't = bullish divergence (reversal coming).
Example: Stock: $100 → $110 → $115
But MACD peaks getting lower: 2.5 → 2.0 → 1.5
Momentum weakening despite rising price = potential reversal
3. Histogram Momentum
Histogram bars getting taller = momentum accelerating (trend strengthening). Histogram bars shrinking = momentum fading (trend weakening).
Growing green bars = strong uptrend
Growing red bars = strong downtrend
Shrinking bars = trend exhaustion
MACD vs RSI: What's the Difference?
| Feature | MACD | RSI |
|---|---|---|
| What it measures | Trend direction & momentum | Overbought/oversold levels |
| Best for | Spotting trend changes | Timing entries/exits |
| Signal type | Crossovers (slower) | Levels (faster) |
| Works best in | Trending markets | Ranging/choppy markets |
| Use together? | Yes! MACD for trend + RSI for timing = powerful combo | |
MACD Mistakes to Avoid
Trading Every Crossover
Not all crossovers are equal. In choppy sideways markets, MACD gives false signals constantly. Wait for confirmation (price breakout, volume increase) before acting.
Using MACD in Ranging Markets
MACD works best in trending markets. In sideways/choppy markets, you'll get whipsawed with constant crossovers that don't lead anywhere. Use RSI instead for range-bound stocks.
Ignoring Price Action
MACD crossover means nothing if price is stuck at resistance or support isn't holding. Always check if price action confirms the MACD signal.
Late Entries
MACD signals come AFTER the move has started (it's a lagging indicator). Don't chase—wait for pullbacks after crossovers to get better entries.
How to Use MACD Successfully
- •Combine with trend analysis: Only take bullish crossovers in uptrends, bearish crossovers in downtrends
- •Wait for histogram confirmation: Histogram should flip color and grow after crossover
- •Check volume: Strong volume on crossover = more reliable signal
- •Use with RSI: MACD crossover + RSI confirmation = high-probability setup
- •Watch divergences: Price/MACD divergences warn of major reversals
- •Use proper timeframe: Day traders use hourly charts, swing traders use daily charts
Common Questions
What are the MACD settings?
The standard settings are 12, 26, 9 (12-period fast, 26-period slow, 9-period signal). Don't change these unless you're experienced—these are tested and widely used.
Is MACD better than RSI?
Neither is "better"—they serve different purposes. MACD = trend changes and momentum direction. RSI = overbought/oversold timing. Use both together for confirmation!
How accurate is MACD?
MACD is reliable in trending markets (60-70% accuracy), but fails in choppy markets. Never use MACD alone—always confirm with price action, volume, and support/resistance.
Can I use MACD for day trading?
Yes, but use shorter timeframes (5-min, 15-min charts). MACD is slower than other indicators, so it's better suited for swing trading (holding 2-5 days) than scalping (holding minutes).
Key Takeaways
- •MACD shows trend direction and momentum through line crossovers
- •Bullish crossover (MACD above signal) = buy signal, bearish crossover = sell signal
- •Histogram bars show momentum strength—growing bars = strong trend
- •Works best in trending markets, unreliable in choppy sideways markets
- •Combine MACD with RSI and volume for high-probability trade setups