Identification

• The MACD indicator values will show at the bottom of the chart as two lines along with a set of vertical bars. The indicator consist of two lines of different color and thickness that move in tandem above and below the zero mark. The two lines also will cross over with each other as they move together. The vertical bars show the difference between the two indicator lines for each period of time selected. All of the popular charting software packages allow the trader to select and include the MACD information in charts.
  
  

Function

• The thick line of the MACD chart is the difference between the 26-day exponential moving average--EMA--of the security's prices and the 12-day exponential moving average. This line will be referred to as the MACD line. The thinner line is the nine-day exponential moving average and is laid over the main MACD indicator to act as a signal or trigger indicator. The bars, often light blue, indicate the difference between the MACD line and the signal line. The main MACD line will be in positive territory when the 12-day EMA is greater than the 26-day EMA.
  
  

Crossovers

• Traders using the MACD indicator are looking for crossovers between the MACD line and the signal line. The MACD crossing from below to above the signal line is a indicator of bullish or upward price move in the charted security. When the MACD crosses below the signal line, the indication is for the security to start a downward price trend. To simplify, MACD crossing upward indicates upward price movement, and MACD crossing downward indicates a downward price trend for the security. The nature of the MACD is that the price of the security may be already moving in the indicated direction, but the crossover shows the move or trend will continue.
  
  

Divergence

• The MACD charting also provides the bar chart or histogram that indicates the difference between the MACD line and signal line. As a trend continues the bars will lengthen as the 9-day EMA changes faster than the MACD. When the histogram bars start to shrink in length it is an indication that the current price trend is ending.
  
  

Potential

• The MACD chart works best in a trending market where prices move in the same direction for an extended period of time before reversing. In these markets, traders will buy on a positive MACD crossover and sell on the negative crossover, using the divergence to watch for an early reversal. In a choppy price market, the MACD has a tendency to provide false trade signals.