This bearish divergence acted as an early warning sign of things to come with the E-mini S&P 500 futures contract. Divergences might signal a trader to get out of a long or short position before profits erode. Notice in this example how closely the tops and bottoms of the MACD histogram are to the tops of the Nasdaq 100 e-mini future price action. When a stock, future, or currency pair is moving strongly in a direction, the MACD histogram will increase in height.

1. The middle chart is a MACD line and histogram, centered around a baseline.
2. Remember, price is the ultimate indicator, with momentum indicators (the MACD histogram is a price derivative and not the price itself) only manipulating price data.
3. The MACD was designed to profit from this divergence by analyzing the difference between the two exponential moving averages (EMAs).
4. When the two EMAs cross at the price chart, the MACD line crosses below 0 as well – I marked the cross with an x and a vertical line.

During the trending phase (#4) the MACD stayed above the 0-line once again.

When the MACD Line crosses 0, it shows that momentum is changing and potentially a new trend might what are software tools be starting. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts. Looking at the E-mini S&P 500 future, from High #1 to High #2, the futures contract made higher highs, which is usually viewed as bullish.

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Given this construction, the value of the MACD Automated trading indicator must be equal to zero each time the two moving averages cross over each other. Some traders will look for bullish divergences even when the long-term trend is negative because they can signal a change in the trend, although this technique is less reliable. As shown on the following chart, when MACD falls below the signal line, it is a bearish signal indicating that it may be time to sell. Conversely, when MACD rises above the signal line, the signal is bullish, suggesting that the asset’s price might experience upward momentum. Crossovers are more reliable when they conform to the prevailing trend.

By monitoring these movements, traders can recognize key trading signals like a divergence, a centerline, or a signal line crossover. This way, the indicator helps you see when a new bullish/bearish trend is about to form. These indicators are often used together to give analysts a more complete technical picture. The relative strength index (RSI) signals whether an instrument is considered overbought or oversold based on its recent price action. The RSI is an oscillator that calculates the average price gains and losses over a given period. A reading above 70 suggests an overbought condition, while a reading below 30 is considered oversold, with both potentially signaling a top or a bottom is forming.

Another common signal that many traders watch for occurs when the indicator travels in the opposite direction of the asset, something known as divergence. This concept takes further study and is often used by experienced traders. Short-term buy-and-sell signals are generated by the MACD line and the signal line. If the MACD line crosses above the signal line, this may be interpreted as a buy signal.

MACD chart

Convergence happens when two moving averages move toward one another, while divergence occurs when the moving averages move away from each other. This indicator also helps traders to know whether the stock is being extensively bought or sold. Its ability to identify and assess short-term price movements makes this indicator quite useful. Traders can use either crossovers or divergences in the MACD to create a trading strategy and can also measure the size and shape of the bars in the histogram.

MACD entries and exits

Next, we have to subtract the long-term EMA from the short-term EMA and that gives us the Moving Average Convergence Divergence. The MACD indicator is the most popular tool in technical analysis because it gives traders the ability to quickly and easily identify the short-term trend direction. MACD is a momentum oscillator that is generally best employed in trending markets—where prices are trending in a particular direction. See the bottom section of the chart below for a sense of what MACD looks like. Trading the MACD involves identifying buy and sell signals based on the interaction of the MACD line and the signal line. A common strategy is to buy when the MACD line crosses above the signal line, as this indicates bullish momentum.

At the most basic level, the MACD indicator is a very useful tool that can help traders ensure that short-term direction is working in their favor. Some traders that utilize this strategy wait for a “trigger,” or some sort of confirmation of the divergence. Both the S&P 500 and MACD have been making higher highs in recent weeks, which suggests that the uptrend may continue. The data used in MACD calculation is based on the historical price action, therefore MACD readings lag the price. However, some traders use MACD histograms to predict when a change in trend will occur. For these traders, this aspect of MACD might be viewed as a leading indicator of future trend changes.

From the What is a Forex CRM chart above, you can see that the fast line crossed UNDER the slow line and correctly identified a new downtrend. A potential uptrend for Bitcoin may be signaled when the MACD line surpasses the signal line. Conversely, a possible downtrend is indicated when the MACD line falls below the signal line. This will depend on what market someone is trading in, as well as their goals and risk tolerance.

It is important to note that both the EMAs are based on closing prices. The convergence and divergence (CD) values have to be calculated first. The CD value is calculated by subtracting the 26-day EMA from the 12-day EMA. A range of indicators work in conjunction with the MACD, including the RSI, moving averages, Bollinger Bands and Fibonacci retracements. In contrast, when a stock price is rising but the MACD is falling, then the current uptrend could be coming to an end, with a bearish retrace in the offing. A MACD chart can also help identify instances where an existing trend is coming to an end.