MACD indicator: settings and signals

MACD shows the divergence of two exponential moving averages of different lengths and the rate at which that divergence changes.

What the indicator looks like on a real chart

What the indicator actually measures

MACD is not an oscillator in the classic sense but a tool for comparing two speeds. The fast EMA(12) reacts to recent prices, the slow EMA(26) reflects a longer context. Their difference is positive when the short horizon outpaces the long one, i.e. at the moment a move accelerates.

The signal line — an EMA(9) of the MACD itself — adds a second layer of smoothing. The histogram, the difference between MACD and the signal line, turns out to be a second-order derivative of price: it shows not the move and not even its speed but the change in speed. That is why the histogram changes sign before the lines cross, and the lines cross before price reverses.

An important consequence: MACD has no fixed scale. Its values are expressed in price units, so a "high" MACD on one instrument and on another are non-comparable numbers, and comparing historical levels makes sense only within a single asset and a single volatility regime.

Formula

The histogram equals MACD minus the signal line, so it crosses zero at exactly the moment the two lines cross. These are not two different signals but one and the same signal shown two ways.

Standard settings

The 12/26/9 set comes from the era of a six-day trading week: 12 and 26 are roughly two and four weeks. There is nothing optimal about these numbers; they simply became the standard and therefore a self-fulfilling reference. The faster 5/35/5 variant is used for earlier entry at the cost of false triggers.

Implementation code (Python)

def macd_histogram(close, fast=12, slow=26, signal=9):
    ema_fast = close.ewm(span=fast).mean()
    ema_slow = close.ewm(span=slow).mean()
    macd = ema_fast - ema_slow
    sig = macd.ewm(span=signal).mean()
    return macd - sig

When the indicator stops working

Common mistakes in use

• Trading every line crossover without a trend filter. That is exactly how MACD turns into a machine for generating commissions in a ranging market.
• Treating a zero-line cross and a signal-line cross as the same event: the first means a change in the sign of the moving-average divergence, the second a change in its dynamics.
• Hunting for divergences on low timeframes, where they appear on almost every pullback and carry no information.
• Comparing the absolute histogram height today and a year ago without accounting for the fact that volatility has changed in the meantime.

Who needs this and why

MACD suits traders working on daily and hourly bars in instruments with pronounced trends. On an instrument that spends most of its time in a range it will produce predominantly false signals.

Frequently asked questions

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