The MACD (Moving Average Convergence / Divergence) is an indicator used in technical analysis to give estimate and predict fluctuations of the asset prices. The indicator was first described by Gerald Appel in his book “Systems and Forecasts” in 1979. Thomas Esprey added a histogram to the MACD in 1986.
Signals and entry points
Being both a trend following indicator and an oscillator, MACD gives the types of signals to entry the market, which are logically quite different. The basic signals of the MACD indicator:
• Crossing the signal line
• Crossing the zero line
The signal line crossover
It is the most common and frequently used signal. The signal appears when the MACD line crosses the signal line. Of course, the type of signal depends on the manner of the intersection:
• The MACD line crosses the signal line in the upwards direction: it is a bullish signal.
• The MACD line crosses the signal line in the downwards direction: it is a bearish signal.
The MACD histogram will display a zero value, as it shows the difference between the MACD line and the signal line of the indicator.
The zero line crossover
• The MACD line crosses the zero line in the upwards direction: it is a bullish signal.
• The MACD line crosses the zero line in the downwards direction: it is a bearish signal.
It is not necessary to have two local maxima / minima to form a divergence. There may be three or more. This means that the precise point of reversal can not be determined this way. The trend does not necessarily reverses. It can simply get flat. Thus, a divergence or a convergence only indicates the slowing of the trend’s strength. A divergence or a convergence can confirm some technical analysis patterns, like a double top or head and shoulders.