MACD (Moving Average Convergence / Divergence)

MACD is a so-called oscillator. Oscillators are not limited to non-trading environments and can be used in trading phases. Oscillators swing between phases and indicate/give signals of overbought and oversold conditions. 

MACD is constructed by two lines, the so-called MACD line and the signal line.

MACD line is created by subtracting the X – 26-day/26-period EMA – from the Y – 12-day/12- period EMA (exponential moving average).

The signal line Z – usually 9-day/9-period EMA – is plotted on top of the MACD line and is an indicator for long/buy or short/sell signals.

When the MACD line crosses above the signal line, it indicates a long/buy signal.

When the MACD line crosses below the signal line, it indicates a short/sell signal.

However, MACD values also fluctuate above and below a horizontal line called the zero line.

Example of crossover on BNB/USD Daily Chart. When the MACD line (blue) crosses the signal line (red) down, the histogram changes from black (bullish) to red (bearish) and is a signal for sell (first red vertical line). When the MACD line (blue) crosses the signal line (red) up, the histogram changes from red (bearish) to black (bullish) and is a signal for buy.

BNBUSDT MACD

However, you can also see on the chart that MACD can fluctuate in a period of lower volume where MACD line and signal line can cross various times in a short period of time with no significant price action.

BNBUSDT MACD 2

That is where divergence comes in play. When the price and the oscillator are moving in a different direction, it indicates a divergence, and it can give you an idea of future price action as the price can change to follow the direction of an oscillator. Using the same BNB/USD Daily chart, you can see that the oscillator trend was moving bullish and price in a bearish direction. Once MACD went from bearish to bullish – crossed the zero line to the positive area, the price has started to explode and went up. 

This is also called a consolidation/accumulation where traders accumulate/consolidate as much asset as possible to gain stronger gains.

Divergence however shouldn’t be used as buy or sell signal. There is no indication of when the change will happen. Divergence should be used as a warning or indication only.

If you’re interested in how to use MACD for scalping, we’re using MACD to scalp NASDAQ.