This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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.