What is **MACD**?

MACD is an acronym for **M**oving **A**verage **C**onvergence **D**ivergence.

This technical indicator is a tool that’s used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish.

After all, a top priority in trading is being able to **find a trend**, because that is where the most money is made.

With a MACD chart, you will usually see three numbers that are used for its settings.

- The first is the number of periods that are used to calculate the
**faster-moving average**. - The second is the number of periods that are used in the
**slower moving average**. - And the third is the number of bars that are used to calculate
**the moving average of the**.*difference*between the faster and slower moving averages

For example, if you were to see “**12, 26, 9**” as the MACD parameters (which is usually the default setting for most charting software), this is how you would interpret it:

- The
**12**represents a moving average of the previous 12 bars. - The
**26**represents a moving average of the previous 26 bars. - The
**9**represents a moving average of the*difference*between the two moving averages above.

There is a common misconception when it comes to the lines of the MACD.

There are two lines:

- The “
**MACD Line**“ - The “
**Signal Line**“

The two lines that are drawn are NOT moving averages of the price.

The ** MACD Line is the difference (or distance) between two moving averages ** . These two moving averages are usually exponential moving averages (EMAs).

When looking at the indicator, the MACD Line is considered the “faster” moving average.

In our example above, the MACD Line is the *difference* between the 12 and 26-period moving averages.

The ** Signal Line is the moving average of the MACD Line. **

When looking at the indicator, the Signal Line is considered the “slower” moving average.

The slower moving average plots the average of the previous MACD Line. Once again, from our example above, this would be a 9-period moving average.

Most charts use a 9-period exponential moving average (EMA) by default.

This means that we are taking the average of the last 9 periods of the “faster” MACD Line and plotting it as our “slower” moving average.

The purpose of the Signal Line is to **smooth **out the sensitivity of the MACD Line.

The **Histogram** simply plots ** the difference between the MACD Line and Signal Line ** .

It is a graphical representation of the ** distance between the two lines**.

It may sometimes give you an early sign that a crossover is about to happen.

If you look at our original chart, you can see that, as the two moving averages (MACD Line and Signal Line) separate, the histogram gets bigger.

This is called a MACD **divergence** because the faster moving average (MACD Line) is “diverging” or moving away from the slower moving average (Signal Line).

As the moving averages get closer to each other, the histogram gets smaller. This is called c**onvergence** because the faster moving average (MACD Line) is “converging” or getting closer to the slower moving average (Signal Line).

And that, my friend, is how you get the name, **M**oving **A**verage **C**onvergence **D**ivergence! Whew, we need to crack our knuckles after that one!

Ok, so now you know what MACD does. Now we’ll show you what MACD can do for YOU.

Because there are two moving averages with different “speeds”, the faster one will obviously be quicker to react to price movement than the slower one.

When a new trend occurs, the **faster line** (MACD Line) will react first and eventually cross the **slower line** (Signal Line).

When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often indicates that a new trend has formed.

From the chart above, you can see that the fast line **crossed UNDER **the slow line and correctly identified a new downtrend.

Notice that when the lines crossed, the Histogram temporarily disappears.

This is because the **difference between the lines at the time of the cross is 0** .

As the downtrend begins and the fast line diverges away from the slow line, the histogram gets bigger, which is a good indication of a strong trend.

Let’s take a look at an example.

In EUR/USD’s 1-hour chart above, the fast line crossed above the slow line while the histogram disappeared. This suggested that the brief downtrend could potentially reverse.

From then, __ EUR/USD__ began shooting up as it started a new uptrend. Imagine if you went long after the crossover, you would’ve gained almost 200 pips!

There is one drawback to MACD.

Naturally, **moving averages tend to LAG behind price**.

After all, it’s just an average of historical prices.

Remember, the MACD indicator consists of three components:

- The
**MACD Line**which represents the difference between two moving averages. - The
**Signal Lin**e which is a moving average of the MACD Line. - The
**Histogram**which is a graphical representation of the distance between the MACD Line and Signal Line.

That said, MACD is still one of the most favored tools by many traders.

Lesson 6: What is a Japanese Candlestick? Lesson 7 :Japanese Candlestick Anatomy Lesson 8:Basic Japanese Candlestick Patterns Lesson 9: Single Candlestick Patterns Lesson 10: Dual Candlestick Patterns Lesson 11: Triple Candlestick Patterns Lesson 12:Japanese Candlestick Cheat Sheet Lesson 13: Candlesticks with Support and Resistance Lesson 14: Common Mistakes That New Traders Make With Japanese Candlesticks Lesson 15: Summary: Japanese Candlesticks

Lesson 16 : Fibonacci Trading Lesson 17: How to Use Fibonacci Retracements Lesson 18: Fibonacci Retracements are NOT Foolproof Lesson 19: How to Use Fibonacci Retracement with Support and Resistance Lesson 20: How to Use Fibonacci Retracement with Trend Lines Lesson 21: How to Use Fibonacci Retracement with Japanese Candlesticks Lesson 22: How to Use Fibonacci Extensions to Know When to Take Profit Lesson 23: How to Use Fibonacci to Place Your Stop so You Lose Less Money Lesson 24: Summary: Fibonacci Trading

Lesson 25: What Are Moving Averages? Lesson 26: Simple Moving Average (SMA) Explained Lesson 27: Exponential Moving Average (EMA) Explained Lesson 28: Simple vs. Exponential Moving Averages Lesson 29: How to Use Moving Averages to Find the Trend Lesson 30: How to Use Moving Average Crossovers to Enter Trades Lesson 31: How to Use Moving Averages as Dynamic Support and Resistance Levels Lesson 32: How to Use Moving Average Envelopes Lesson 33: How to Analyze Trends With Moving Average Ribbons Lesson 34: How to Trend Trade with Guppy Multiple Moving Average (GMMA) Lesson 35: Summary: Using Moving Averages

Lesson 36: How to Use Bollinger Bands Lesson 38: How to Use the MACD Indicator Lesson 37: How to Use Keltner Channels Lesson 39: How to Use Parabolic SAR Lesson 40: How to Use the Stochastic Indicator Lesson 41: How to Use RSI (Relative Strength Index) Lesson 42: How to Use Williams %R (Williams Percent Range) Lesson 43: How to Use ADX (Average Directional Index) Lesson 44: Ichimoku Kinko Hyo Lesson 45: Trading with Multiple Chart Indicators Lesson 46: What is the Best Technical Indicator in Forex? Lesson 47: Summary: Popular Chart Indicators