Moving Average Convergence Divergence (MACD)

The MACD is a technical indicator used in finding trends in their infant stage of formation.
MACD indicator is made up of 4 important parts:

When the MACD line crosses the signal line from bottom-up, the histogram turns green indicating buying potential.

When the MACD line crosses the signal line from the top-down, the histogram colour turns red indicating selling potential.

The MACD line is formed by subtracting the Exponential Moving Average (EMA) for 12 previous candles from the EMA of 26 previous candles, then plotting it in a graph.

The Signal Line is formed by taking an EMA or SMA of 9 previous MACD line figures.

The Histogram displays how far apart both MACD & Signal Lines are from each other. The further apart these lines are, the larger the histogram.

The Zero Line is there as a reference point so that the histogram oscillates/revolves around it.

How to Trade with MACD Indicator

For a green histogram, ensure the MACD line crosses the signal line from beneath the zero line before you open a buy order. This will help you to be sure the potential upward trend will be sustained.

For a red histogram, the lines should cross each other above the zero line before you open a sell order so you can be sure the potential downtrend will be sustained.

The limitation of the MACD indicator is that it depends on Exponential Moving Averages, which don’t usually smoothen out all the market noise caused by small meaningless candles.

So you may get false breaks when markets are highly volatile.