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MACD Indicator Purpose

Moving-Average Convergence/Divergence Oscillator, commonly known as MACD, is a Forex technical indicator developed by Gerald Appel and based on the differences among moving averages calculated for different periods. MACD is intended to reveal changes in the direction and strength of the trend by combining signals from three time series of moving average curves.

MACD considers as a popular tool between precious metals investors due to its relatively easy-to-interpret signals.

MACD Indicator Usage

MACD indicator consists of two lines - the blue MACD line and the red signal line. Usually, the histogram or bar graph reflects the difference between the two previously mentioned lines. It has no upper or lower limits and oscillates around zero.

There are 3 main signals generated by MACD indicator and the following are:

  • MACD line crosses the Signal line and it indicates there may be a trend change. If the MACD line is growing faster than the Signal line and crosses it from below, the signal is interpreted as bullish and suggests acceleration of price growth. If the MACD line is falling faster than the Signal line and crosses it from above, the signal is interpreted as bearish and suggests extension of price losses;
  • MACD line crosses zero and represents the difference between a short-term (generally 12-period) and a longer-term (generally 26-period)moving average curves. So when it crosses the X-axis, there is also a connection between the two moving average curves. The bullish trade signal appears if the MACD line climbs above zero and a bearish signal if the MACD line falls below zero.

  • When the MACD line is trending in the same way as the price, the pattern is known as Convergence. But if they move in opposite directions, the pattern is Divergence. For example, if the price arrives at a new high, but the line does not (divergence), this may be a sign of further weakness.

MACD Indicator Calculation

MACD line = 12-period EMA – 26-period EMA
Signal line = 9-period EMA
Histogram = MACD line – Signal line

EMA — the Exponential Moving Average;
SMA — the Simple Moving Average;
SIGNAL — the signal line of the indicator.

Moving Average of Oscillator is the difference between the oscillator and oscillator smoothing. So, in this situation,MACD line is used as the oscillator, and the signal line is used as the smoothing:



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