Technical Analysis Teaching-MACD Indicator Usage

The MACD indicator (Moving Average Convergence/Divergence) is called the "King of Technical
Indicators" by many people. Under the main image of many software, the MACD indicator will be
displayed by default, which shows the popularity of MACD

The MACD indicator has three parameters, and the default parameters are set to 12 days, 26
days, and 9 days.

This article contains the following key points, which will help everyone understand the principle
and usage of the MACD indicator

Table of contents:

MACD indicator principle: What is MACD an indicator?

MACD indicator principle: How to calculate the MACD indicator?

MACD indicator usage: How to use MACD to find buying and selling points?

MACD indicator usage: How to view the MACD indicator?

MACD indicator usage: MACD indicator FAQ.

MACD indicator principle: What is MACD an indicator?

MACD indicator (English: Moving Average Convergence/Divergence) It is a classic indicator for
predicting trends

The MACD indicator was proposed by American Gerald Appel in the 1970s and is a long-standing
and widely used technical analysis tool

The MACD indicator consists of three key parts: MACD line, signal line and histogram. By
analyzing the intersection and differentiation of the two indicator lines of the MACD indicator, it
helps us to intuitively understand the price trend and intensity changes

MACD indicator principle: How to calculate the MACD indicator?

The MACD indicator includes three parts: DIF, DEA and MACD histogram. The calculation formula
is as follows:

MACD line (DIF, fast line) = 12-day moving average (EMA) - 26-day moving average (EMA)

Signal line (DEA, slow line) = 9-day moving average (EMA) of the MACD line

Histogram (MACD histogram) = MACD line - signal line

Note that in some trading software, the MACD line is also called the DIF line and the signal line is
called the DEA line.

You only need to have a general understanding of the principles behind the calculation formula of
the MACD indicator. Many stock software will automatically calculate and display it for us. What
we need to do is how to analyze the MACD indicator
The principle of the MACD indicator is to subtract the average price of a longer period (long-term
EMA) from the average price of a shorter period (short-term EMA). The resulting difference is the
MACD line (DIF line), which can reflect Potential upward or downward trends in the market

On this basis, further buying and selling signals are generated through a signal line. The signal line
is the exponential average of the MACD line. It responds relatively slowly to the stock price trend
and lags behind the MACD line, so it is also called the "slow line", while the MACD line is the "fast
line". These two lines, fast and slow, cross or diverge from each other, which can clearly release
potential buying and selling signals

The histogram is even simpler. Its value is equal to the fast line minus the slow line. For easy
observation, positive and negative values are distinguished in red and green. If the histogram is
positive (green) and continues to expand, it indicates that the upward energy is strengthening; if
the histogram is negative (red) and it continues to expand, it indicates that the downward energy
is strengthening. Note that in order to display the histogram more intuitively, some software will
double its value, that is, histogram = (MACD line - signal line) × 2

MACD indicator usage: How to use MACD to find buying and selling points?
The MACD indicator is generally used in two ways, namely crossover strategy and divergence
strategy.

crossover strategy
Cross strategies are divided into golden cross and death cross, referred to as golden cross and
death cross

golden cross
Golden Cross (Golden Cross) means that the MACD line crosses the signal line upward (the fast
line crosses the slow line upward). At this time, the histogram turns from negative to positive,
and the color changes from red to green, indicating that the market has turned from weak to
strong, and may follow There is a wave of rise, which is a potential buying signal.

death cross
Death Cross (Death Cross) means that the signal line crosses the MACD line upwards (the slow
line crosses the fast line upwards). At this time, the histogram turns from positive to negative,
and the color changes from green to red, indicating that the market has turned from strong to
weak, and the next step may be There will be a wave of decline, which is a potential sell signal.

Please note that when identifying golden crosses and death crosses, the simplest and fastest way
is not to look at the fast and slow line trends, but to look at the size and color changes of the
histogram. When the histogram gradually shrinks and changes from red to green, it is a golden
cross; conversely, when the histogram gradually shrinks and changes from green to red, it is a
death cross.

divergence strategy
Divergence strategies are divided into bottom divergence and top divergence, also known as long
divergence and short divergence.

Divergence refers to the phenomenon that technical indicators and price trends diverge from
each other. For leading indicators such as MACD, because its trend is ahead of the price, if the
two diverge, it means that the price may gradually correct, so we can find buying and selling
signals from it

MACD bottom divergence

Bottom divergence means that the price has fallen below the previous low, but the MACD line
(fast line) is higher than the previous low, indicating an upward trend. This indicates that the price
may turn from falling to rising, which is a potential buying signal.

MACD top divergence

Top divergence means that the price has risen above the previous high, but the MACD line (fast
line) is lower than the previous high, that is, showing a downward trend, which indicates that the
price may turn from rising to falling, which is a potential selling signal

MACD Indicator Usage: MACD Indicator Frequently Asked Questions

The MACD indicator is very practical, but some beginners are prone to misunderstandings and
usage misunderstandings. Here we will briefly help you sort out the related issues of MACD.

What is the difference between MACD and Moving Average (MA)?

The Chinese name for MACD is called Exponential Smoothed Moving Average of Convergence
and Divergence, and there is some overlap with the name of the Moving Average (MA), which
confuses some people.

Simply put, MACD is an upgraded version of MA. MACD has the following advantages over MA:

First, MA generally refers to the simple moving average (SMA), while MACD uses the exponential
moving average (EMA). The calculation method of EMA is slightly more complicated than SMA
and is equivalent to an improved SMA
Second, MACD is calculated from the difference between two EMAs and can reflect changes in
trend and intensity. This is a function that a single MA does not have

Third, MA is the main chart indicator, which is superimposed on the candlestick chart, while
MACD is the secondary chart indicator, which is generally displayed in an independent window
below the candlestick chart. It will not overlap with other indicators and make the candlestick
chart look bloated

Can MACD be used to evaluate overbought and oversold?

Overbought and oversold refers to the imbalance of buying and selling power in the short term,
causing prices to rise/fall excessively, and therefore the opposite trend may follow

Many energy indicators can be used to evaluate whether a security is overbought or oversold,
such as the stochastic indicator (KDJ indicator), the relative strength indicator (RSI indicator), and
so on. Some people mistakenly use MACD to evaluate overbought and oversold, but this
approach is inappropriate. Because the MACD indicator has no boundaries in theory, it is difficult
to say that when MACD exceeds a certain limit, it will mean that the market may reverse

A more appropriate approach is to use the MACD indicator in conjunction with some overbought
and oversold indicators. If MACD and other technical indicators release the same buying and
selling signals at the same time, investors can have greater confidence when making trading
decisions