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# MACD (Moving Average Convergence Divergence)

In our articles on SMA (Simple Moving Average) and EMA (Exponential Moving Average), we have seen how useful comparing several Moving Averages can be to detect trends. The Moving Average Convergence Divergence is an indicator built from the difference between two Exponential Moving Averages of different periods. The Moving Average Convergence Divergence (MACD) indicator is a technical analysis tool used to identify potential trend reversals and confirm existing trends. It is composed of two exponential moving averages that are calculated using different parameters. The first line, called the MACD line, is calculated by subtracting a 26-day exponential moving average from a 12-day exponential moving average. The second line, called the signal line, is calculated by taking a 9-day exponential moving average of the MACD line.

### How to calculate the MACD indicator?

The first thing to calculate are the two EMAs. Generally, traders prefer to use a 12-period and and 26-period EMA. You may refer to our article on Exponential Moving Averages if you don't know how to calculate an EMA. The first element of the indicator is then the difference between the shorter and the longer EMA. A Signal line is added, which consists in the 9-period EMA of the MACD.

### How to interpret the Moving Average Convergence Divergence?

The MACD gives us three informations. First, the it indicates the direction of the trend. A rising MACD line represents a positive trend - since it means that the short EMA is above the long EMA. A downward line represents a negative trend.

Second, this indicator also gives the strength of the trend. The greater the distance between the two lines, the stronger the trend. Indeed, the greater the distance, the fastest the price is moving away from the two EMAs. And remember that the short EMA follows the price quicker than the long one. This translates into larger candles. The larger the candle, the stronger the trend.

Third, the MACD indicator also gives buy or sell signals. It is generally considered that the MACD line crossing above the Signal line gives a buy signal. When the MACD line crosses below the Signal line, the indicator gives a sell signal.

#### On the price chart:

• The blue line is the 12-period EMA.
• The yellow line is the 26-period EMA

#### On the MACD chart:

• The pink line is the MACD (the difference between the 12-period EMA and the 26-period EMA).
• The green line is the Signal (the 9-period EMA of the MACD).
• The bar chart represents the MACD. It is green and facing upward when the MACD is positive, and red and facing downward when it falls below 0.

We can see that the market turns bullish when the MACD gives a buy signal. The MACD line crosses above the Signal line. The trend reversal is signaled way before the the 12-period EMA crosses above the 26-period EMA. The market becomes bearish when the MACD falls below the Signal line.

### What other technical analysis indicators can be used in conjunction with the MACD?

When used in combination with other technical analysis tools and indicators, the Moving Average Convergence Divergence (MACD) indicator can provide improved market analysis. Here is a list of other indicators that can be used in combination with the MACD indicator:

• Relative Strength Index (RSI): The RSI can be used in combination with the MACD to confirm overbought and oversold conditions. When the RSI is above 70 and the MACD is showing a bearish crossover, it can indicate that the market is overbought and may be due for a correction.
• Bollinger Bands: Bollinger Bands can be used in combination with the MACD to confirm trend direction and potential trend reversal. When the price is moving outside of the Bollinger Bands and the MACD is showing a bearish crossover, it can indicate that the trend is reversing.
• Fibonacci Retracement: Fibonacci Retracement levels can be used in combination with the MACD to identify key levels of support and resistance. When the price reaches a key Fibonacci level and the MACD is showing a bullish crossover, it can indicate that the trend is likely to continue.
• Moving Averages: Moving averages can be used in combination with the MACD to identify the overall direction of the trend. A bullish signal is generated when a shorter-term moving average crosses above a longer-term moving average, and when this happens at the same time as a bullish MACD crossover it can confirm the trend.
• Ichimoku Cloud: The Ichimoku Cloud is a set of indicators that can be used in combination with the MACD to identify potential trend reversal and support and resistance levels. When the price is above the cloud and the MACD is showing a bearish crossover, it can indicate that the trend is reversing.
• Volume: Volume can be used in combination with the MACD to confirm the validity of the pattern. When the volume is high and the MACD is showing a bullish crossover, it can indicate that the trend is likely to continue.

It's important to note that no single indicator is perfect, and traders should use a combination of indicators to confirm the validity of any potential trading signals. Additionally, it's important to keep in mind that technical analysis is not a sure thing, it's a tool that can be used to help traders make more informed decisions. It's crucial to always have a risk management plan in place and not to rely solely on a single indicator to take any trading decision.