Here is a closer look at how to read MACD graphs and methods for using this indicator for technical analysis.
What is the MACD indicator?
The MACD indicator is a separate graph that usually appears under the price chart for your chosen market. It lines up with the chart so that the data from the MACD corresponds with the price action for the same timeframe.
Calculating the MACD involves using the exponential moving averages (EMAs). EMAs are weighted averages that favour the most recent data, which makes them slightly more sensitive to current market conditions than regular moving averages.
Finally, some traders may look at the position of the lines in relation to the zero line that cuts through the middle of the graph.
While 26, 12, and 9 are the default settings for MACD charts, trading platforms like MetaTrader 4 allow you to alter these settings to increase or decrease the indicator’s sensitivity.
How to read MACD graphs
MACD crossovers
Some strategies use the zero line, also known as the baseline, to confirm the validity of the crossover. Traders may only think a buy signal is useful when the MACD line crosses over when it is below or at the zero line. Likewise, they may only consider opening a short position if the signal line crosses over when it is above the zero line.
Below is an example of a MACD crossover.
MACD histograms
Some traders may see the histogram trend as it approaches the zero line and receive an early warning about the coming crossover. Some may even use the upward or downward histogram trend as a signal to get into the market before the crossover occurs.
MACD divergence
Both price charts and MACD graphs move in waves. Because of this trait, it can be difficult to see divergence. However, you can add trend lines connecting the highest or lowest lows of each wave in the price and indicator charts.
You can look at these lines rather than trying to guess the direction by glancing at the chart.
MetaTrader 4 allows you to draw trend lines manually directly on your charts using a cursor tool.
How to read MACD with other indicators
For example, if you notice a MACD crossover, you may look to a candlestick chart to see if you can find any reversal signals. You can also look at the RSI.