**Index**show

**MACD** is an acronym for **Moving Average Convergence Divergence**

In this lesson of the CFD course we will explain how it is calculated, how it works and how to use it. To test it in practice, you can access **this platform** with a quick registration and a trial demo account.

## What is the MACD?

It is a “**momentum**” indicator that “follows trends” and shows the relationship between two moving averages of prices. The MACD is therefore calculated by subtracting a 26-period exponential moving average (EMA) from the 12-period exponential moving average (EMA). Another 9-period EMA is used as a reference and is called a “signal line” and is placed above the MACD, offering buy or sell signals.

Those who wish can review the lesson on moving averages.

Difficult? Let’s recap:

- EMA = Exponential Moving Average = Exponential Moving Average (you will not have to calculate it, you will find it already drawn on the chart!)
- MACD = 26-period EMA – 12-period EMA
- Signal line = a line warning what to do = 9-period EMA

Below is an example of a chart with MACD. In green, the MACD. In blue, the sign.

## How is the MACD used?

The **MACD in trading** can be used in three different ways depending on how you interpret the market:

a) **Cross**

When the MACD falls below the signal line (9-period EMA), this method interprets it as a bearish signal and therefore invites to sell. On the contrary, when the MACD rises above the signal line, the indicator should be interpreted in a bullish way (see figure), starting from the moment of the crossing below zero.

Many traders wait for a confirmation crossover above the signal line before opening a position to avoid being penalized by entering a position too early.

b) **Divergence Divergence**

refers to when the price diverges from the MACD. This is the signal of the end of the current trend.

c) **Sudden rise**

When the MACD shows a very strong rise (the shorter moving average jumps from the long-term one) the signal is buying in excess and, therefore, it will soon return to normal levels.

## Zero line

Traders are also watching movements above and below the zero line with interest as this indicates the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is higher than the long-term average. On the contrary, when the MACD is below zero, the short-term average is lower than the long-term average.

The **zero line** often acts effectively as **a support and resistance zone** for the indicator.

Go to the next lesson on Bollinger Bands.

## MACD FAQ

**What is the MACD?**

It is an indicator used in the technical analysis of financial markets and stands for Moving Average Convergence Divergence. **How does MACD work?**

The operation of the MACD is based on the comparison between three exponential moving averages in 26, 12 and 9 periods. **How is the MACD used?**

Monitoring price movements against MACD lines. **What signals does the MACD indicator offer?**

The MACD can offer various signals, including bullish, bearish, end of a trend (reversal), and overbought.

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