How to Use Moving Average Convergence/Divergence (MACD)

Key Takeaways

The Moving Average Convergence/Divergence (MACD) indicator is a popular tool used in technical analysis to identify potential trend and momentum shifts in financial asset prices. 

Developed by Gerald Appel in the late 1970s, MACD has since become a staple for traders and analysts in various markets, including stocks, forex, commodities and cryptocurrencies.

In addition to trend and momentum information, the indicator offers traders insight into overbought or oversold market conditions, and also functions as a form of back-up which can be used to confirm a given price move.

When using it, traders look for crossovers of MACD’s constituent trendlines as key trading signals.

MACD: An Overview

At its heart, Moving Average Convergence/Divergence (MACD) tracks the interplay between two exponential moving averages (EMAs). It is from these that its signals are generated.

On an MACD chart, two trendlines are visible, but these are not simply EMAs. Rather, on TabTrader, MACD features the MACD line and the signal line.

The indicator works by following how these two trendlines relate to one another as price moves. In addition to these, a histogram is provided to show the relative distance between one trendline and another.

By default, the MACD line is colored blue and the signal line red on TabTrader charts, but this, like the indicator’s other parameters, is freely customizable.

How the indicator generates signals nonetheless remains the same regardless of the parameters used — crossovers are key, and can reveal important trend changes on both longer and shorter timeframes.

In brief, when an asset’s 12-period EMA is above its 26-period EMA, the MACD line will be positive. This suggests that recent price action is comparatively strong. The reverse is also true — a negative MACD line value suggests a downtrend, with recent price action lower than earlier in the lookback period.

For the sake of clarity, the EMAs are not displayed on the indicator chart, but can be added to the price chart manually to confirm their relationship with MACD values. 

How Is the MACD Line Calculated?

The first key component of the MACD indicator, the MACD line, formed from two exponential moving averages (EMAs).

EMAs differ from simple moving averages (SMAs) in that they are weighted to give more influence to more recent price data. They thus track price more in a more responsive manner than SMAs.

To derive the MACD line, the value of 26-period EMA is subtracted from the equivalent 12-period EMA.

This is done for each period, with the result plotted as a line. In TabTrader, parameters can be freely adjusted to change the color and general appearance of the MACD line, as well as the EMAs used to calculate it if necessary. 

Moving Average Convergence/Divergence (MACD) line = 12-Period EMA − 26-Period EMA

For more information on both EMAs and SMAs, consult the dedicated TabTrader Academy guide here.

How is the Signal Line Calculated?

The MACD line forms one of the two trendlines visible on an MACD chart. The second is known as the signal line, and is derived from the MACD line.

Once the MACD line is plotted, the signal line can be calculated as a 9-period exponential moving average (EMA) of the MACD line. Again, this parameter can be edited in TabTrader.

When using standard parameters, the MACD line and signal line will remain fairly close to one another, even when accounting for periods of snap volatility.

Signal line = 9-Period EMA of the MACD line

MACD Histogram

In TabTrader, the MACD indicator is supplied with a third element in addition to its two trendlines: the MACD histogram.

This feature essentially tracks the interaction between the MACD line and the signal line, letting observers know how far away from each other they are and if they are trending apart or closer together.

It can be thus said that the histogram is an “indicator of an indicator”, being based on existing MACD data derived from two trendlines.

The MACD histogram provides useful insights in its own right. MACD trendline crossovers form key signals for traders, and the histogram helps predict these, as well as monitor broader trend changes. 

What does the MACD Histogram Tell You?

The MACD histogram principally measures the distance between the MACD line and the signal line.

In so doing, it also identifies the same things as the indicator itself: convergences and divergences in price, as well as crossovers of the two trendlines.

Analyzing histogram data can help a trader predict when a trendline crossover might occur ahead of time. The histogram bars can also be analyzed for divergences of its own compared to the MACD trendlines, which can in turn forecast a change of trend in price.

The chart below offers one such instance of an MACD histogram divergence. Here, the histogram shows the gap between the MACD line and signal line hitting a lower high during April 1, while the trendlines themselves are making lower lows.

This ultimately precludes a short-term bounce within an overall downtrend which nonetheless continues later on. 

The above example constitutes what is commonly referred to as a “slant divergence” — the higher low in the histogram bars is not pronounced. By contrast, classic bullish or bearish divergences can look much more obvious. 

These shallower slant divergences are as rule less reliable signals when it comes to predicting enduring crossovers — and hence enduring trend changes.

Examples of MACD Strategies

Thanks to its composite nature, there are various ways in which MACD can be put to use as part of a crypto trading strategy.

As with any basic indicator, MACD is not used as a standalone method of trading a given asset, but rather in conjunction with other indicators which can help reinforce the reliability of a given signal.

Some of the most popular MACD implementations are discussed below.

Crossover Strategy

The MACD line and signal line form the centerpoint of the MACD indicator, and when they cross over one another, they generate its ‘classic’ trading signals.

Here, traders look for the MACD line crossing the signal line (the 9-period EMA of the MACD line) as a signal to enter the market. This phenomenon reflects more recent price action being comparatively bullish, with the implication that further upside should result. 

The reverse constitutes an opportunity to go short an asset — the signal line crossing back under the MACD line reflects weaker price action which may end up being a full-fledged downtrend.

There is not a great deal of certainty in crossover signals. As shown in the chart below, a crossover comes after the key price event that generates it, and it is thus a lagging trading signal.

This may not matter in strongly-trending markets which are frequently found in crypto, but less volatile price action can lead to frequent shallow crossovers which only last for a small number of periods. Trading these can be difficult or even risky thanks to the lagging nature of crossover signals — by the time one appears, price may already be on the way to canceling it out.

Zero Line Crossover Strategy

Another crossover which is commonly employed by traders focuses on the MACD line and signal line crossing the 0 value.

Here, the implications are clear: crossing 0 from below indicates the start of a new uptrend, while crossing it from above suggests the opposite.

Zero crosses take time to materialize after a price event, and thus traders can miss a portion of the move while waiting for them. Despite this, zero line signals can be reliable indicators of a trend change with staying power once they print. As with trendline crossovers, however, markets which are tightly rangebound may produce frequent false signals.

Enhancing MACD With Other Indicators

A trait common to many of the most popular crypto trading indicators is their ability to be combined to improve trading signals.

This is not merely an optional addition to a given strategy; basing market entries or exits on a single indicator alone is highly risky. 

MACD And RSI

With this in mind, TabTrader recommends using MACD in conjunction with complementary indicators to give a more rounded insight into market trends and avoid falling victim to false signals.

The Relative Strength Index (RSI) is a classic counterpart to MACD. In use since the 1970s, this momentum indicator offers insights into the strength of a given uptrend or downtrend.

When MACD shows an uptrend beginning, for instance via a zero line crossover, RSI can inform a trader about the likely sustainability of that trend.

In the chart below, BTC/USD produces an MACD crossover on the June 17 candle. This is followed by a zero line crossover on June 20, and an entry here would secure the lion’s share of the subsequent price upside.

Using RSI as well, however, gives an earlier entry signal. RSI crosses the central 50 mark on June 19 and continues to rise, cementing conviction about the strength of the nascent uptrend.

RSI is another of TabTrader’s most widely used indicators, and a full guide to it can be found at the TabTrader Academy. 

MACD And the Stochastic Oscillator

Another powerful partner of MACD is the Stochastic Oscillator. 

Like RSI, this indicator offers a picture of the extent to which an asset is overbought or oversold at a given price.

Here, traders likewise look for double crossovers taking place — one on the Stochastic Oscillator followed by one on MACD, ideally occurring in quick succession.

The double cross strategy offers traders peace of mind compared to relying on MACD crosses alone — an uptrend can be confirmed more confidently, allowing for a foolproof entry. Double crosses additionally provide more certainty to trend reversals.

Limitations of MACD

MACD does not constitute a full trading strategy basis in and of itself. 

As an indicator, it does not suit all forms of trading environment and applying it freely without backtesting its signals can lead to misreading the market and executing loss-making trades.

A key stumbling point for MACD is sideways or non-trending markets. Here, crossovers can occur frequently, and their lagging nature can lead to market entries which do not produce returns before the signal invalidates. This is what is known as whipsawing. 

Traders may receive conflicting buy and sell signals in quick succession, resulting in losses or missed opportunities. Depending on the trade at stake, losses during such sideways price action can end up substantial, especially when leverage is involved.

If traders choose to alter its settings, MACD can also produce too many ‘noisy’ trading signals or, conversely, too few, with the latter again resulting in potential missed entry or exit opportunities. 

Conclusion

Moving Average Convergence/Divergence (MACD) is one of the most popular trading indicators in use across crypto and beyond.

For both entry-level and professional traders, the indicator offers key actionable trading signals for market entries and exits, and pairs extremely well with other widely-used metrics.

MACD informs observers about market strength and direction, and can also preempt changes in trend trajectory. Using it in conjunction with other indicators, most commonly Relative Strength Index (RSI), reinforces the impression it gives of a market and avoids fake signals.

Using MACD on its own, however, is not recommended. The indicator cannot provide an overarching picture of price action, and applying it at random can lead to erroneous trades which lose money.

It is most suitable for volatile or strongly-trending markets; those which lack volatility or trend sideways provide fertile ground for false MACD signals.

Boost Your Crypto Trading with MACD on TabTrader

TabTrader gives users access to high quality, fully customizable implementations of crypto’s most popular indicators. 

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Available for iOS, Android and Web, TabTrader puts the power to leverage the unique world of crypto at your fingertips, whether at home or on the go. Download it here.

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FAQ

What is MACD and how do you use it?

MACD is a momentum indicator which can be applied to crypto as well as traditional financial assets. It shows the relationship between two moving averages and highlights when recent price action is comparatively strong or weak. The fluctuating space between the two moving averages is what gives the indicator its name.

Is MACD bullish or bearish?

MACD generates signals for trend reversals, and may be equally applied to both uptrends and downtrends. The indicator can produce multiple crossovers, each of which constitutes its own trading signal. 

What is the best MACD setup for crypto?

Crypto is notoriously volatile at times, and altering indicator parameters can add further confusion to already erratic price action. TabTrader thus recommends initially using the default MACD parameters as applied on the app — changing them can result in either too many poor-quality signals or missed opportunities.

What is the best MACD strategy?

How effective MACD will be within a trading strategy depends on the specific market setup, but in general, it is advisable to leverage MACD signals in combination with those of other indicators. Relying solely on signals from a single indicator can lead to a false impression of price action and loss-making trades. The Relative Strength Index (RSI) is a common partner for MACD, as it helps to determine the strength of a trend or potential trend reversal.