What is the MACD in trading?
The MACD is a momentum indicator (momentum being the strength of a move) created by Gerald Appel. It subtracts the 26-period exponential moving average from the 12-period one and compares the result with its own 9-period average, called the signal line. It shows whether price momentum is speeding up or slowing down.
The three parts of the MACD
The standard setting is 12, 26, 9, and each number corresponds to one part of the indicator:
- MACD line: the 12-period exponential moving average (EMA) minus the 26-period one. It’s positive when the fast average is above the slow one.
- Signal line: a 9-period EMA of the MACD line itself.
- Histogram: the distance between the MACD line and the signal line. If the bars grow, momentum is accelerating; if they shrink, it’s slowing down.
Example: if the 12 EMA is at $52.40 and the 26 EMA at $51.10, the MACD line reads 1.30. If the signal line is at 1.05, the histogram shows +0.25.
How to read it
- Position relative to zero. Above zero, the 12 average is above the 26: the short-term bias is bullish. Below zero, it’s bearish.
- Signal line crossovers. When the MACD line crosses above the signal line, bullish momentum is gaining strength; when it crosses below, it’s losing it.
- Histogram. It usually gives the earliest warning: shrinking bars show the move is losing energy before the lines cross.
How it’s used in practice
The MACD works best as confirmation. Many traders use it to check that momentum backs up the trend they see in price, and to notice when that momentum starts to fade. A divergence (price makes a new high and the MACD doesn’t) is a warning that the move is tiring, although price can keep rising for quite a while.
Since the RSI also measures momentum, using both at once usually repeats the same information in a different format.
An example reading
Example: a stock in an uptrend makes a high at $58 with the MACD line at 1.40. It pulls back, rises again, and makes a new high at $60, but this time the MACD line only reaches 0.90 and the histogram stays lower than on the first push. Price went higher, but with less strength: that’s a bearish divergence.
That doesn’t say price is going to fall. It says the momentum pushing it is weakening. Someone already in a position can use that information to review their stop or target, and someone who isn’t can use it to avoid chasing the price. Confirmation comes from price itself, for example if it breaks its last meaningful low.
Limitations
- It lags. It’s built from moving averages, so it reacts after price does.
- It fails in ranges. When price moves sideways, the lines cross back and forth, and almost all of those signals are false.
- It isn’t comparable across assets. Its value is in price units: a MACD of 2 on a $400 stock isn’t the same as a MACD of 2 on a $20 stock. Unlike the RSI, it has no fixed scale.
Ben · the MentorThe MACD lags by design: it’s built from moving averages. Use it to confirm what you already see in price, not to guess what’s coming.
Learn it in depth in lesson 2.5: Momentum: RSI and MACD
In the course you practice it with real charts, pop quizzes and an exam that tells you whether you really got it. Start free with lesson 1.1; no card required.
Frequently asked questions
What do the numbers 12, 26, and 9 in the MACD mean?
They are the periods of its averages. The MACD line is the 12-period EMA minus the 26-period EMA, and the signal line is a 9-period EMA of that difference. It’s the setting its creator proposed and the one almost every platform uses by default.
Which is better, the MACD or the RSI?
Neither is better in general. Both measure momentum, but in different ways: the RSI moves on a fixed scale from 0 to 100, while the MACD tracks the relationship between two averages. Since they say similar things, many traders pick one to avoid duplicate signals.
What does the MACD histogram show?
The distance between the MACD line and the signal line. Growing bars mean momentum is accelerating; shrinking bars mean it’s slowing down. That’s why it often anticipates the line crossovers, although it also gives false warnings.
Related terms
Educational content from The Trading Path. Not a recommendation to buy or sell any asset.