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The moving average convergence divergence (MACD) is one of the most commonly used technical analysis indicators among the trading community. The tool provides three elements, each of which can be used to provide trading signals.
The two lines within the indicator may look like simple moving averages (SMAs), but they are in fact layered exponential moving averages (EMAs). The main, slower line is the MACD, while the faster line is the signal line. Finally, the difference between the two is represented on a histogram.
This article gives you three commonly used methods by which traders can utilise this tool to signal buying and selling opportunities.
The MACD line and signal line can be utilised in much the same manner as a stochastic oscillator, with the crossover between the two lines providing buy and sell signals. As with most crossover strategies, a buy signal comes when the shorter-term, more reactive line (MACD line) crosses above the slower line (signal line). Conversely, when the MACD line crosses below the signal line it provides a bearish sell signal.
. As this indicator is lagging by nature, it is worthwhile noting that strategies which utilise price action for confirmation of a signal would likely be more reliable.
The chart below highlights this standard crossover strategy. Profitable entry points are highlighted by green vertical lines, while false signals are highlights by red lines.