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In this lesson, you’ll discover how to use the MACD (Moving Average Convergence Divergence) indicator, a powerful trend-following momentum tool that combines two different types of indicators to analyze trend changes, confirmation, and duration in your trading.
The MACD is constructed using three exponential moving averages, though only two lines appear on your chart. The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA. The signal line is the nine-period EMA of the MACD itself. The third component, the MACD histogram, represents the difference between the MACD line and the signal line, making divergences easily identifiable and showing the momentum strength in a stock.
You can use the MACD in several practical ways. The first method involves watching for crossovers with the signal line—a bottom-up crossover is called a bullish crossover, while a top-down crossover is a bearish crossover. When the MACD line crosses the signal line, it can signal the start of a new trend. The histogram value is positive when MACD is above the signal line and negative when below. If the histogram is above zero but approaches the zero line, this may represent a weakening trend.
The most powerful application combines the histogram analysis with market structure and support/resistance levels. The width of histogram bars represents strong momentum in the market. By identifying periods of strong bullish or bearish momentum and observing how price reacts at support or resistance levels, you can find excellent entry points. Examples using Boeing and Amazon stocks demonstrate how strong momentum movements shown in the histogram interact with key price barriers—supports can bring new buyers pushing prices up, while resistance can bring new sellers pushing prices down.
To add the MACD to your charts, go to TradingView under Indicators and add it. By double clicking, you can change the colors and settings. Remember that as a lagging indicator based on past prices, the MACD should always be used in conjunction with other indicators to confirm signals from market structure and the clash between supply and demand.
Video Chapters
00:00 – Introduction to MACD indicator
00:22 – Components of MACD: MACD line, signal line, and histogram
01:24 – How MACD histogram works and momentum indication
02:31 – Adding MACD on TradingView and crossover signals
03:34 – Using histogram with support and resistance analysis
04:25 – Boeing and Amazon stock examples
Key Takeaways
The MACD combines three exponential moving averages (12-period, 26-period, and 9-period) to identify trend direction, momentum, and duration
Bullish crossovers occur when the MACD line crosses above the signal line, while bearish crossovers occur when it crosses below
The histogram width represents momentum strength, and analyzing it alongside support/resistance levels helps identify excellent entry points
Always use MACD in conjunction with other indicators and market structure analysis, as it is a lagging indicator based on past prices
Video Transcription
[00:00:00.05] - Speaker 1 In this lesson we talk about another important indicator, the macd. The MACD indicator shows the convergence or divergence of moving averages. It stands for moving average convergence Divergence. It is heavily used to analyze change trend confirmation and its duration. MACD is a trend following momentum indicator.
[00:00:22.07] - Speaker 1 What makes the MACD indicator so useful is the combination of two different types of indicators. The MACD uses three moving averages of varying length to identify the direction of the trend. A traditional MACD setup is as Three exponential moving averages or three lines are needed to construct the macd. However, only two lines will be displayed on the chart since one pair of the three just mentioned is used only to calculate their difference. We have three components of the MACD indicator.
[00:00:55.09] - Speaker 1 The MACD line, the Sigma line and the histogram. The first moving average, the fastest one, is calculated over 12 periods. The slower one instead is at 26 periods. The MACD line is calculated by subtracting the 26 period exponential moving average from the 12 period EMA. In addition to the MACD line, there's usually a Sigma line which is the nine period EMA of the MACD itself.
[00:01:24.16] - Speaker 1 The MACD histogram is the difference between the MACD line and the signal line. This difference is presented as a histogram making divergences easily identifiable. The MACD indicator is used in technical analysis to identify changes in the strength, direction, momentum and duration of a trend in a stock's price. This is how it looks in a chart. If the MACD value is higher than the signal line value, then the MACD histogram value will be positive.
[00:01:56.24] - Speaker 1 If the MACD value is below the signal line, the MACD histogram value will be negative. The histogram is seen by traders as a good indication of the amount of momentum in a stock. If the histogram is above the zero value but begins to approach the zero line, this may represent a weakening trend. The MACD indicator is used to capture the momentum of a stock, increase your odds of success and identify potential breakout trades. To add the MACD, we can go on TradingView under Indicators and add it to the chart.
[00:02:31.05] - Speaker 1 By double clicking we can change the colors and settings. Now let's do some practical examples of how to use macd. The first example of how to use the MACD is through the crossover with the signal line. A bottom up crossover is called a bullish crossover while a top down crossover is called a bearish crossover. In this chart on the snap stock, we see how we can get interesting signals using this crossover.
[00:02:57.09] - Speaker 1 As the MACD line crosses the signal line, we see a big spike in price and the start of the trend. Note that this type of approach should always be used in conjunction with other indicators. In this case, we are using the trend following component of the MACD and as we have already mentioned in the moving averages lesson, this type of indicator is a lagging indicator which can present a delay as it is based on past prices. In the second example, we analyze how to use the histogram and the analysis of support and resistance. It is important to use MACD in conjunction with market and price structure.
[00:03:34.23] - Speaker 1 The histogram you see in the graph is calculated by subtracting the MACD line with a signal line. It represents the momentum component of the macd. The width of the histogram bars represent strong momentum in the market. The way to use the histogram is to look at strong bullish or bearish momentum points and see how these moves land on support or resistance levels or where there might be a price barrier. We are then trying here to analyze a possible rejection of the price.
[00:04:04.00] - Speaker 1 In this example, on Boeing stock we see the MACD at the bottom. We have two areas identified by the red rectangle and the green one. They represent two periods of strong bearish and bullish momentum. In the first case, Boeing is in a strong downtrend after March 2020. The histogram shows a strong downward momentum.
[00:04:25.10] - Speaker 1 By analyzing the structure of the graph, we can draw the long term support. In fact, the stock reached its lowest point in 2017. The idea in this case is that the support can act as a barrier and bring new buyers to the market who will push the price up again, as in this case. In the second case on the right, we see a strong bullish momentum. However, the price reaches a resistance represented by the trendline.
[00:04:50.29] - Speaker 1 New sellers come to the market and push the price down, as in this case. Using the MACD histogram together with an analysis of the market structure helps us to find excellent entry points. Now let's look at a second example on the Amazon stock. In this part of the graph we see a lateral movement of the stock. The first movement is in strong bearish momentum.
[00:05:13.23] - Speaker 1 Let's see how the histogram shows this movement. However, the price reaches a support level and stops. New buyers enter the market, pushing the price up. The price then moves with a strong bullish momentum, also confirmed by the movement of the histogram in the second rectangle. The price then reaches a resistance and stops.
[00:05:34.10] - Speaker 1 New sellers enter the market pushing the price down. The price then swings in a range until it again shows strong bearish momentum in the latter part of the chart. Once again, the price stops at the support level. To conclude, these examples are significant and help us understand how to use the various indicators to confirm what is signaled to us by the market structure or by the clash between supply and demand. We will continue our session on indicators in the next lessons.
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