Do you know how to read the MACD study? This study will be added to our divergence series. We will discuss how to read MACD and how it should be used. What is the MACD? A “moving average” study presents “convergence and divergence” signals between the Value Line and the average line. As a result, it’s also known as the Moving Average Convergence Divergence. For other divergence studies, you can check out the RSI Divergence Indicator Study and the OnBalanceVolume Indicator Study.
Table of Contents
How to Read the MACD Study Indicator
- Value = MACD Line
- Avg = Moving average of the MACD Line
- Diff = Difference between the Value and the Avg
- Value Line is the value we get when we subtract the 26EMA from the 12EMA
In the picture below, we open the user dialog box for the MACD Study inside ToS and see the signal settings. Let’s take a closer look.
From left to right, we have Value, Avg, and Diff. ZeroLine, UpSignal, and DownSignal are also present, but we can set them aside for now. To better understand how to read MACD, we need to understand what these things are inside this user dialog box.
Value, Avg, & Diff make up the critical pieces of the MACD Indicator Study.
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Decipher
Now that we have identified what the names represent, we can decipher how to read MACD and what the moving average convergence divergence signals are made of. As a result, the picture below a candle stick chart shows the 26EMA and 12EMA.
The Value Line in the MACD study is nothing more than the value we get when subtracting the 26EMA from the 12EMA.
The Calculations for the MACD.
How to Read MACD Value Line
The Value Line by itself does not offer many useful signals. However, one signal it does offer alone is the slope or market trend direction. When the Value line is pointed up, the price is on an uptrend. Likewise, if the value line points down, the price is downtrend.
The steeper the slope on the value line, the stronger the trend’s momentum. Remember that the Value Line is derived from two moving averages.
Like moving averages, the Value Line Slope can offer some important clues. A sideways Value line indicates market uncertainty, consolidation, or “ranging patterns.” Use this as a guide on how to read MACD.
How to Read MACD Avg Line
The average line is the Value Line Average. Think about this for a moment. We took the 26EMA value and subtracted the 12EMA value to get the MACD Line.
Now, we have the average line of the MACD Line. Understanding why this is beneficial will help you understand why the MACD study is such a powerful tool and why you need to know how to read MACD, especially when trading low-float stocks.
Averages provide access to the mean. Since NO ONE can predict the market, the best we can do is try to understand what has already happened and try to develop an understanding of what COULD happen next based on the previous data.
An Average of ANYTHING is a great way to visualize where the COMMON ACTION is. To visualize where the “NORMAL” can be found. Once we can identify “normal,” we can begin looking for signals that are not normal.
Value Line, Avg Line, & Diff Histogram
Histogram
The Diff is presented in the MACD study as a Histogram. The Diff is the measured distance between the Value and average lines.
The picture above shows that the Diff Swabs become shorter when the Value Line converges with the Avg line. When the Value Line and the Avg Line cross over, the Diff Swabs cross over from one side of the Zero Line to the other.
This is because the Diff Line measures the distance between the Value Line and the Avg Line. They have no distance to measure When they touch (during the cross-over).
How to Read MACD Study Default Settings
When learning how to read MACD, the Avg Line has a default setting of 9EMA. If you look back at the picture of the user dialog box, you’ll see a Fast Length, a Slow Length, and a MACD length. We have already shown that the Fast Length default is 12 and the Slow Length default is 26. Now we understand the MACD Length is the length used to measure the average line.
A normal MACD study sets the average line with a default of 9. It is the average of the average convergence or divergence. Perhaps it is time to understand those terms more to understand better how to read MACD.
Example of Bullish Divergence
Convergence
The MACD line is the measurement between two moving averages, as presented above. When those two moving averages move toward each other, they converge.
We’ve learned from the Moving Average Blog that when moving averages move toward each other, it signals failing momentum. By measuring this movement towards each other, we can develop some analysis of the strength of the trend presented by the sloped Value Line. As a result, we can better understand how to read MACD.
An example of Bearish Divergence
What Is Divergence?
Again,
The signal is given when two moving averages spread out and move away from each other. By analyzing this movement, we can measure the strength of the presented trend. The slope of the Value line does this.
The two moving averages separate because the slower moving average will follow slower. The farther away these two moving averages become, the steeper the slope and the greater the divergence.
The MACD crosses the Zero Line when the 12EMA and 26EMA cross-over
Zero Line Cross-Over
What causes the Value Line to cross over the Zero Line? The Moving Averages on the price chart.
Look at the picture above; you can see that when the 12EMA and the 26EMA cross, the Value Line crosses the zero line.
How to Read MACD Study 2 Lines
The first line is the Value Line (or the MACD Line). It’s the value of the distance between the 26EMA and the 12EMA. This measurement of the convergence and divergence between these two EMAs is the MACD or value lines.
The EMA of the Value Line is called the Avg Line. The Diff Swab is the measurement between the Value Line and the Avg Line. This is also known as the MACD Line and the MACD Average.
Internal Indicators
The Value Line is a measurement of moving averages on the price chart. The Avg Line and the Diff Swabs are internal indicators and ONLY measure the Value Line. They have nothing to do with price at all. The Avg Line and the Diff Swabs are an indicator of an indicator.
The MACD is not a “GO / NO GO” study that will offer you trade entries and trade exits. The MACD Study is designed to watch for changes in the current market direction.
That’s it: current direction, impending directional change, and momentum strength of the current market direction. The Value Line shows direction, and the Diff Swabs show momentum.
Hence, knowing how to read MACD is important to trading the indicator.
Review of MACD Value Line, Avg Line, & Diff Histogram
Strategies
We clearly understand how to read MACD and where the signals come from. We may begin developing a few strategies that use these signals.
The Trend can be defined from a higher time frame
How to Read MACD Study and Define the Trend
The MACD may be used to develop a bias in market direction and determine the trend. As a result, knowing how to read MACD can help define a trend. One way to do this effectively is to apply the MACD on a higher time frame.
As a result, the trend is determined, and then trades that go with said trend. For example, if you trade on the 4-hour chart, you would want to look at the daily chart with the MACD to develop a trend bias.
If you trade on the 1-hour, you want to set the MACD onto a 4-hour chart to determine market bias. The MACD will show trend bias with the Value Line.
Trade the Trend
The
This indicator has great swings above and below the Zero Line. The Value Line presents more signals than just being above or below the average line. Look at the slope of the Value line and the length of the Diff Swabs.
The average line tells a story of impending market trend change. On these trading days, avoiding trading the stock, using a lower time frame, or anticipating an uncertain market would be good.
As a result of knowing how to read MACD, you can trade the trend and know when to sit out.
A signal that the trend is ending
Consolidation
If you know how to read MACD, then you know it’s a great tool to identify when price action is range-bound. When looking for an anticipation trade, the MACD can show when volatility is low, price action is consolidating, and momentum begins to build for an explosive move out of the contraction.
The picture below shows where the Diff Swabs leveled off and swapped above and below the Zero Line as the price ranged in a tight pattern. These signals are clear and offer an opportunity to anticipate a move before the breakout.
MACD gives signal that a breakout has begun
Price Action Divergence
The MACD is a great tool to identify price action divergence by looking at the trending Value Line and the trending price. However, I still believe that building a divergence signal into the MACD Indicator Study allows the trader to focus on other factors.
For instance, instead of continuously seeking divergence between price action and the MACD, you can wait for a divergence signal that identifies when divergence has occurred.
A beneficial tip: lower timeline charts have a lot of divergence signals that produce few meaningful results. This tip doesn’t apply just to the MACD but to all divergence studies in lower timelines.
Bullish Divergence
How to Read MACD Failure
The MACD Indicator Study I’ve coded offers Bearish or Bullish Divergence signals when price action and the MACD line disagree. You find them when you know how to read MACD. These divergences allow the trader to develop a stock trading strategy based on an impending change in trend or momentum.
The picture below shows the new MACD Dialog Box with the Bullish and Bearish Divergence user settings. These signals can be turned on or off and appear on the Zero Line when a divergence is detected.
Divergence Signals will show up on the Zero Line
In Review
This article discusses how to read MACD, divergence, price action, trend direction, and momentum. These common trade tactics are the backbone of a full trading strategy.
It doesn’t matter if you’re a swing trader, day trader, options trader, or even a futures trader; the basic trading tactics discussed in this blog should be familiar. Hence, there is a need to understand 100% before taking a trade.
As a member of the Bullish Bears Community, you’ve paid for access to thousands of dollars worth of education and training. Ensure you take advantage of the value you’ve paid for if you’re serious about stock market trading.
MACD Trade Entry Signals
One of the great things about being an individual trader is developing our skills, abilities, and opinions about market analysis and trade strategies. The more we learn and grow in our abilities, the better our analysis becomes.
I don’t consider the
Can it be used as a signal for entry? However, other tools were designed to give such signals and do a better job. The MACD was not designed to provide entry signals.
Divergence Study Indicator
The ThinkOrSwim MACD study I developed can be added using the Copy / Paste commands. The link is:
How to Read MACD Crossover Signals
When you first started trading, you may have heard that moving average crossovers are a great trade entry signal. Much information suggests using
Look back over the charts after the market has closed. Compare the EMA crossovers to the market price action. You may have seen some great opportunities. However, if you tried to trade that strategy in real life, you may have found that there are fake-out signals, failed entries, or changes in direction soon after the crossover.
Using two moving averages as a signal to enter a trade at the crossover is bad. The MACD is nothing more than a measurement of two moving averages.
Final Thoughts: How to Read MACD
Learn how to read MACD. The MACD is a great indicator that offers a trader’s perspective on the direction of the market trend, the strength, and signals of approaching trend changes or failing momentum.
Market Forecasting is a skill that must be developed by study and practice.
While we did not review modifications to the MACD user settings, you now better understand the MACD indicator. As a result, you may begin to research different ways to adapt and develop MACD trading strategies that fit your
Frequently Asked Questions
The default MACD settings are (12, 26, 9) which relates to the 12 period exponential weight average, 26 'fast line', and the 9 which is the 'slow line'.
The MACD is a trend reversal indicator, similar to the stochastic oscillator. It provides buy and sell signal lines.
A buy signal happens when the MACD line crosses the signal line. A sell signal happens when the MACD line falls below the signal line.
