The MACD is a popular indicator that traders use to spot trend strength, direction, momentum, and duration changes. It's classified as a "lagging" indicator, meaning that it's based on past price action.
To calculate the MACD, we take the difference between two exponential moving averages (EMA's) of the closing price, and then chart it over time together with a moving average of the difference.
Traders often refer to both the entire indicator and the MACD line itself as "MACD." There are three individual components of the MACD: the MACD line, the signal line, and the histogram.
The MACD line reflects changes in the market trend, while the signal line is a moving average of the MACD line and moves slower. The histogram represents the extent to which the MACD line is above or below the signal line and highlights divergences between the two lines.
To focus solely on how the two lines interact, many traders choose to turn off the Histogram. However, this indicator may be less useful for markets not trending or trading erratically.
Assuming standard settings, the MACD line is calculated as the 12-day EMA minus the 26-day EMA, while the signal line is the 9-day EMA of the MACD line. When both the MACD and signal lines are above the zero level of the histogram, price action should be viewed with bullish momentum. Conversely, if the MACD and signal lines are below the zero line of the histogram, price action should be considered bearish.