Technical analysis indicators condense price information, providing analytical insight and trading signals which may not be obvious on a stock's price chart. The Moving-Average-Convergence-Divergence MACD indicator fluctuates above and below zero, highlighting both the momentum and trend direction of a stock. Utilizing the MACD effectively requires understanding how it works, its functions and applications, as well as its limitations. Gerald Appel developed the MACD in the s, and it is one of the most popular indicators in use today. Traders use the MACD for determining trend direction, momentum and potential reversals. It is used to confirm trades based on trading strategies, but it also provides its own trade signals. Figure 1 shows the MACD applied to a daily chart of Apple AAPL stock. Two strategy compose the MACD: These lines move together, except the MACD moves faster as the Signal line is a moving average of the MACD line. The MACD Histogram that oscillates above and below zero shows the extent to which the MACD line is above or below signal line. Line histogram provides a short-term view on recent momentum and direction. When the histogram is above zero, recent movement has been higher; below zero and the recent momentum was down. The greater the histogram value the greater the momentum of the recent move. The Histogram is not always shown as part of the MACD strategy as many traders prefer to focus on the how the two lines MACD and Signal are interacting. These two trading are the source of most MACD strategies and price analysis. The MACD Histogram is the MACD Line — Signal Line. There are three primary uses for the MACD indicator, each offering advantages and disadvantages. Combing all three functions will help eliminate some losing MACD trade signals, as will using the MACD in conjunction with other indicators and price analysis. Moves across the zero line on the indicator represent times when the 12day EMA is crossing the 26day EMA. When the MACD crosses the zero line from below, a trading uptrend may be emerging. When the MACD crosses the zero line from above a new downtrend may be emerging. Figure 2 shows several zero line crossovers in International Business Machines IBM. The strategy is to buy when the MACD crosses above the zero line, and sell or take short positions when the MACD line black crosses below the zero line. During choppy conditions this results in losing trades, and is profitable when strong trends emerge. Hold long trades until the MACD crosses back below the zero line. Hold short trades until the MACD crosses above the zero line. To utilize this strategy, traders need to implement their own form of risk control see next section. Zero line crossovers also confirm trends. When the MACD line is above zero it helps confirm uptrends and other strategies that indicate taking long positions. Below zero, the MACD confirms downtrends and taking short trades based on other strategies. Signal line crossovers provide better timing, and are preferred by most traders to zero-line crossovers. With this method, a buy signal occurs when the MACD line crosses above the Signal line. A sell short signal occurs when the MACD line crosses below the Signal line. Figure 3 shows IBM again, this time using Signal line crossovers. The buy and sell signals occur earlier in the price move than zero-line crossovers, potentially providing better entry and exit prices. Since the MACD is an indicator, and not a trading system, there is no stop loss. For buy signals a stop can be placed below a recent low, and for short signals a stop can be placed above the recent high. There are no built in targets, so trades are held until a crossover in the opposite direction occurs. New trades can then be initiated in the new crossover direction. One way to avoid use whipsaws is to only take trades in the direction of the long-term trend. If the trend is up, only take a buy signals, and exit when the MACD line crosses back below the Signal Line. It shows that momentum has slowed, and a reversal could be forthcoming. It shows selling pressure has slowed, and a reversal higher could be around the corner. A stock can continue to rise fall for a long time even while bearish bullish divergence is occurring. In Figure 4 the price tries to make a new low in late March, but the MACD is already making higher highs. This indicated the move lower would potentially fail and a rally would ensue. In May the price makes a new high but the MACD is making a lower high. This warns buying pressure has slowed and that the move higher could fail. The MACD line is based on the difference between the day and day EMA see calculation. The Signal line is a 9-period EMA of the of the MACD line. Increasing the number of periods for the Signal line will reduce the number of crossover signals, helping avoid false signals. The drawback is that trade signals will occur later in the price move than they would with a shorter Signal line EMA. Figure 5 shows this in action. Two MACD indicators are shown; the top one uses a 9-period signal line and bottom one uses a period signal line. The top one has more crossovers, but gets you into the long trade soon. The bottom one gets you into the trade later, but there are no crossovers, letting you to profit more from the extended uptrend. Traders need to therefore implement their own risk and profit management tactics. If the MACD is above zero it helps confirm an uptrend; below zero and it helps confirm a downtrend. Zero line and Signal line crossovers are used as trade signals to enter and exit trending trades. Losing trade signals occur when crossovers occur in rapid succession due to choppy price action. Combing different elements of each strategy makes the indicator more useful, such as taking buy signals following a bullish divergence. Using price and trend analysis will aid in determining which signals to take, such as only taking buy signals when a long-term uptrend use in place. Active traders can use this list to find potential candidates and screen for the most attractive Are you looking for stocks that are showing signs of bottoming out? Here is a look at some of the Is your portfolio starving for dividends? Here is a look at the highest yielding securities in Enter your e-mail address to subscribe. Low Volatility ETFs invest in securities with low volatility characteristics. These funds tend to have relatively stable share prices, and line than average yields. Investors who suspect that the stock market may be about to decline can take action to reduce the Thank you for selecting your broker. Please help us personalize your experience. 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What is the MACD Line The MACD is calculated as follows: To utilize this strategy, traders need to implement their own form of risk control see next section Zero line crossovers also confirm trends. Get Email Updates Subscribe to receive FREE updates, insights and more, straight to your inbox. News 25 Best and Worst Performing Stocks This Week: June 15 Sneha Shah Jun 15, News Stocks Bottoming Out This Week: June 14 Sneha Shah Jun 14, Tools Periodic Table of Asset Bubbles. Education A Trader's Guide to Tops and Bottoms Beginner's Guide to Sector Rotation Top 21 Trading Rules for Beginners: A Visual Guide 50 Blogs Every Serious Trader Should Read What Is Day Trading? Legal Privacy Policy Terms of Use Follow TraderHQ. Enter your e-mail address to subscribe Powerful trading insights sent every weekday morning Gain instant access to actionable trading tips Strategically improve your trading strategy. We Respect Your Privacy. 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