What Is MACD?
The MACD (Moving Average Convergence Divergence) is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs) of a stock’s price. It was developed by Gerald Appel in the late 1970s and remains one of the most popular technical indicators.
MACD helps answer two questions: What direction is the trend? and How strong is the momentum?
The Three Components of MACD
- MACD Line — The difference between the 12-day EMA and the 26-day EMA. When the fast EMA is above the slow EMA, the MACD line is positive (bullish). When below, it’s negative (bearish).
- Signal Line — A 9-day EMA of the MACD line. It acts as a trigger for buy and sell signals. When the MACD line crosses above the signal line, it’s bullish. When it crosses below, it’s bearish.
- Histogram — The visual difference between the MACD line and the signal line. When the histogram is positive and growing, bullish momentum is increasing. When negative and growing, bearish momentum is increasing.
MACD Crossover Signals
Bullish Crossover (Buy Signal)
A bullish crossover happens when the MACD line crosses above the signal line. This means the short-term momentum (12-day EMA) is accelerating faster than the medium-term trend (26-day EMA). It’s the MACD’s way of saying: momentum is shifting upward.
The strongest bullish crossovers occur below the zero line. This means the stock was in a downtrend and momentum is now reversing — a potential early sign of a new uptrend.
Bearish Crossover (Sell/Short Signal)
A bearish crossover happens when the MACD line crosses below the signal line. Short-term momentum is decelerating. The strongest bearish crossovers occur above the zero line, signaling that an uptrend may be losing steam.
Reading the MACD Histogram
The histogram is the most sensitive part of the MACD. It turns before the crossover happens, giving you an early warning:
- Histogram growing (positive, getting taller) — Bullish momentum is accelerating.
- Histogram shrinking (positive, getting shorter) — Bullish momentum is fading. A bearish crossover may be coming.
- Histogram growing (negative, getting deeper) — Bearish momentum is accelerating.
- Histogram shrinking (negative, getting shallower) — Bearish momentum is fading. A bullish crossover may be coming.
How Scanance Uses MACD
Scanance uses the standard MACD settings (12, 26, 9) on daily charts and generates signals based on crossovers:
- MACD Buy — The MACD line has crossed above the signal line (bullish crossover). The histogram value is shown so you can gauge the strength of the signal.
- MACD Short — The MACD line has crossed below the signal line (bearish crossover).
The scanner shows both the MACD value and the histogram value for each signal. A large positive histogram indicates strong bullish momentum, while a large negative histogram indicates strong bearish momentum.
MACD Divergences
Like RSI, MACD can show divergences that warn of potential trend reversals:
- Bullish MACD divergence — Price makes a lower low, but MACD makes a higher low. Selling pressure is weakening.
- Bearish MACD divergence — Price makes a higher high, but MACD makes a lower high. Buying pressure is weakening.
Common MACD Mistakes
- Trading every crossover — Not every crossover leads to a sustained move. Filter crossovers using trend indicators (MA150, MA200) and check if the crossover occurs near key support/resistance levels.
- Ignoring the zero line — Crossovers below zero (for buys) and above zero (for sells) tend to be more significant.
- Using MACD on short timeframes — MACD generates many false signals on intraday charts. Daily charts give the most reliable signals.
- Relying on MACD alone — MACD tells you about momentum, not trend structure. Combine with moving averages for trend context.