Deep Dive Into Moving Average Convergence Divergence (MACD)🗓 The Moving Average Convergence Divergence (MACD) is one of the most popular momentum indicators in technical analysis. Whether you're a beginner or an experienced trader, understanding how the MACD works can significantly enhance your trading decisions.
📚 Introduction: What Is MACD and Why It Matters
The MACD (Moving Average Convergence Divergence) is one of the most powerful and widely used momentum indicators in technical analysis. It was developed by Gerald Appel in the late 1970s and has since become a staple in the toolkit of traders and investors across markets — from stocks and forex to cryptocurrencies.
At its core, MACD helps traders understand the relationship between two moving averages of an asset’s price, providing insight into both trend direction and momentum strength. By analyzing how these averages converge and diverge, the indicator offers valuable signals for entries, exits, and trend reversals.
What makes MACD especially popular is its versatility — it works well in trending markets, can be used across all timeframes, and combines both leading and lagging components. Whether you're a day trader or a long-term investor, understanding how MACD works gives you an edge in making timely and informed trading decisions.
📚 How the MACD Is Calculated: The Components Explained
The MACD is built from three core components: MACD line, Signal line and MACD histogram.
🔹 Calculating the MACD Line:
The MACD line is the difference between two Exponential Moving Averages (EMAs), typically 12-period EMA (fast) and 26-period EMA (slow). The formula is:
MACD Line = EMA(12) − EMA(26)
This line captures momentum by tracking how the shorter-term average diverges from the longer-term average. When the MACD line rises, the short-term momentum is increasing faster than the longer-term trend — a sign of bullish acceleration. The reverse implies bearish momentum.
🔹 Calculating the Signal Line:
To reduce noise and provide clearer signals, a 9-period EMA of the MACD line is plotted on top. This is the Signal Line, and it acts as a trigger:
When the MACD line crosses above the signal line → bullish signal (buy)
When the MACD line crosses below the signal line → bearish signal (sell)
Signal Line = EMA(9)(MACD Line)
🔹 Calculating the MACD Histogram:
The Histogram shows the difference between the MACD Line and the Signal Line:
Histogram = MACD Line − Signal Line
It provides a visual representation of momentum strength. The histogram bars expand when momentum strengthens and contract as it fades. It helps you spot shifts in momentum earlier than a basic crossover.
📚 How to Use MACD in Trading Strategies
⚡️MACD Signal Line Crossover
Buy Signal:
MACD Line crosses above the Signal Line from below (bullish crossover)
Preferably when both lines are below the zero line (early in the trend)
Price closes above the long-term trend approximation, in our case we use 200-period EMA
Sell Signal:
MACD Line crosses below the Signal Line from above (bearish crossover)
Preferably when both lines are above the zero line (early in the trend)
Price closes below the long-term trend approximation, in our case we use 200-period EMA
📈Long Trading Strategy Example
1. Wait until MACD line crosses over the Signal line from down to up. In our example we use 1D time frame for BITMART:BTCUSDT.P . Open long trade if point 2 will be completed.
2. Price candle shall be closed above the 200-period EMA. This is long-term trend filter to increase the probability that trades will be open only in the direction of the main trend.
3. Close the long trade when the MACD line crosses under the Signal line. This is an approximation that short-term impulse is over and correction is about to start.
In our case we have +20% return on this long trade, but, please, notice that we have not used initial stop-loss in this strategy. Trade was closed according to the technical condition, this approach can violate the risk management rules, but also can be applicable if you trade the amount ready to lose using this strategy. We will talk about stop-loss later.
📉Short trading strategy example
1. Wait until MACD line crosses under the Signal line from up to down. In our example we use 1D time frame for BITMART:ETHUSDT . Open short trade if point 2 will be completed.
2. Price candle shall be closed below the 200-period EMA. This is long-term trend filter to increase the probability that trades will be open only in the direction of the main trend.
3. Close the short trade when the MACD line crosses over the Signal line. This is an approximation that short-term impulse is over and correction is about to start.
In this case we have +15% return on the short trade. Again, strategy used the technical condition to close the trade and now let's cover how to place the stop-loss. There is no right answer how to use stop-losses. The first and the most obvious way to place stop-loss is using recent swing low/high, but the problem is that all traders are seeing them and do the same. Price tends to reach such levels to collect liquidity.
Another one way to place stop-loss is using the signal candle's high/low. This is so-called 1 candle stop-loss. Usually it's very tight and can allow to have the fantastic risk to reward ratio, but we are now recommend to use it if you are not a professional trader because win rate of such strategy decreases.
Third approach in placing stop-loss which we often use in our algorithmic strategies is the Average True Range (ATR). ATR is the volatility measurement, it allows to take into account the current volatility. Sometimes it helps to avoid the stop-loss hit when trade finally goes in your direction. You can just simply subtract (in case of long trade) or add (in case of short trade) ATR value to the entry price and obtain the dynamic stop loss based on current market condition. Also multiplier can be used for ATR. You shall choose the approach which is more comfortable for you, backtest all these approached to make your choice.
🧪Important: we used the long signals only below the zero-line and short signals above it in the attempt to catch the beginning of a trend and have large potential move. On the picture below you can see the same BITMART:BTCUSDT.P , but what will happen if we open long on the lines crossover above zero line? This trade will not be profitable because of restricted potential.
⚡️MACD Zero Line Crossover
Buy Signal:
MACD Histogram crosses above the zero line (momentum shifts from bearish to bullish)
Price closes above the long-term trend approximation, in our case we use 200-period EMA
Sell Signal:
MACD Histogram crosses below the zero line (momentum shifts from bullish to bearish)
Price closes below the long-term trend approximation, in our case we use 200-period EMA
📈Long Trading Strategy Example
1. Wait until MACD Histogram crosses over zero line. Open long trade if point 2 will be completed.
2. Price candle shall be closed above 200-period EMA. This is long-term trend filter to increase the probability that trades will be open only in the direction of the main trend.
3. Take profit when price reaches 3:1 risk to reward ratio according to the stop-loss from point 4.
4. Stop-loss shall be placed below recent swing low. This point can be discussed, you can use any stop-loss technique described earlier in this article. We demonstrate the simplest one, the key here is using at least 3:1 RR.
📉Short trading strategy example
1. Wait until MACD Histogram crosses under zero line. Open short trade if point 2 will be completed.
2. Price candle shall be closed below 200-period EMA. This is long-term trend filter to increase the probability that trades will be open only in the direction of the main trend.
3. Take profit when price reaches 3:1 risk to reward ratio according to the stop-loss from point 4.
4. Stop-loss shall be placed above recent swing high. This point can be discussed, you can use any stop-loss technique described earlier in this article. We demonstrate the simplest one, the key here is using at least 3:1 RR.
⚡️MACD Divergence Strategy
MACD Divergence is a strategy that helps traders identify potential reversals in market direction before they become obvious on the price chart. This makes it a favorite tool among swing traders and crypto enthusiasts looking to catch major moves early.
But what exactly is a divergence? In simple terms, divergence occurs when price and momentum (MACD) are moving in opposite directions — signaling that the current trend may be losing strength and preparing for a reversal. There are two main types of divergence.
🐂 Bullish Divergence
Price makes a lower low
MACD Histogram makes a higher low
This suggests that while price is still falling, downward momentum is weakening. The bears are losing control, and a bullish reversal may be near. Trading signal is very simple, when bullish divergence happens wait for the first increasing column on MACD histogram and open long trade. Place stop-loss under recent swing low and take profit at 3:1 RR.
🐻Bearish Divergence
Price makes a higher high
MACD makes a lower high
This suggests that while price is still falling, downward momentum is weakening. The bears are losing control, and a bullish reversal may be near. Trading signal is very simple, when bearish divergence happens wait for the first decreasing column on MACD histogram and open short trade. Place stop-loss above recent swing high and take profit at 3:1 RR.
🧪 Important hint: MACD histogram shall cross the zero line between two lows/high to create the most reliable divergence signals. We are not recommend to use it without zero-line crossover to decrease number of false signals.
📈Long Trading Strategy Example
1. MACD Histogram shall create higher low.
2. Price shall create lower low.
3. MACD Histogram shall cross the zero line between lows.
4. MACD Histogram shall show the first increasing column.
5. Put stop-loss under the recent swing low.
6. Put take profit at 3:1.
🧪 You can enhance the long signal with the MACD Line divergence. In our case we have both divergences: with MACD Histogram and MACD Line.
📉Short trading strategy example
1. MACD Histogram shall create lower high.
2. Price shall create higher high.
3. MACD Histogram shall cross the zero line between lows.
4. MACD Histogram shall show the first decreasing column.
5. Put stop-loss above the recent swing high.
6. Put take profit at 3:1.
🧪Divergence is extremely strong signal, but when price continue it's move in the direction of a trend and it's not reversing it can also be the signal for the trend continuation. This situation is called "Baskerville Hound" signal, this name was given by famous trader Alexander Elder. We don't recommend to use it for novice traders, but it's useful to know about it.
📚 Conclusion
The Moving Average Convergence Divergence (MACD) is more than just a crossover tool — it's a powerful momentum indicator that offers deep insight into the strength, direction, and timing of market trends. By understanding how the MACD line, Signal line, and Histogram interact, traders can uncover early trend shifts, spot momentum divergences, and time entries and exits with greater confidence.
Whether you're a short-term trader using fast crossovers for scalping or a long-term investor watching for weekly divergences, MACD can adapt to your style when used thoughtfully. Like all indicators, it works best when combined with price action, support/resistance levels, and other indicators — not in isolation.
Ultimately, mastering MACD is not about memorizing patterns, but about learning to read the story of momentum that unfolds beneath the surface of price. With disciplined application and practice, MACD can become a reliable compass in your trading strategy.
