MACD

What it is

MACD is the gap between a fast and a slow EMA of price (12 and 26 by default), plotted as a line. A signal line (a 9-period EMA of the MACD) is drawn with it, and a histogram shows the distance between the two.

The MACD line crossing above its signal line shows momentum turning up; crossing below shows it turning down. Crosses above and below zero show the fast average crossing the slow one.

How to spot it

• Line crossing the signal line, and the histogram flipping from negative to positive (or back).
• Divergence between MACD and price, as with RSI.

How to use it

• Use crosses in the direction of the trend, after a pullback.
• Use a shrinking histogram as a sign that a move is slowing.

Common mistakes

• Trading every cross in a sideways market.
• Forgetting that it's built from moving averages, so it always lags.

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