what macd signals
the macd line is calculated by subtracting the 26 period ema from the 12 period ema the calculation creates the macd line a nine day ema of the macd line is called the signal line plotted on top of the macd line which can function as a trigger for buy or sell signals traders may buy the security when the macd line crosses above the signal line and sell or short the security when the macd line crosses below the signal line macd indicators can be interpreted in several ways but the more common methods are crossovers divergences and rapid rises falls macd formulamacd 12 period ema 26 period ema text macd text 12 period ema text 26 period ema macd 12 period ema 26 period emamacd is calculated by subtracting the long term ema 26 periods from the short term ema 12 periods an ema is a moving average ma that places a greater weight and significance on the most recent data points the exponential moving average is also an exponentially weighted moving average an exponentially weighted moving average reacts more significantly to recent price changes than a simple moving average sma using macdmacd has a positive value shown as the blue line in the lower chart whenever the 12 period ema indicated by the red line on the price chart is above the 26 period ema the blue line in the price chart and a negative value when the 12 period ema is below the 26 period ema the level of distance that macd is above or below its baseline indicates that the distance between the two emas is growing in the chart below the two emas applied to the price chart correspond to the macd blue crossing above or below its baseline red dashed in the indicator below the price chart image by sabrina jiang investopedia 2022macd is often displayed with a histogram see the chart below that graphs the distance between macd and its signal line if macd is above the signal line the histogram will be above the macd s baseline or zero line if macd is below its signal line the histogram will be below the macd s baseline traders use the macd s histogram to identify when bullish or bearish momentum is high and possibly for overbought oversold signals image by sabrina jiang investopedia 2022macd vs relative strengththe relative strength index rsi signals whether a market is considered overbought or oversold to recent price levels the rsi is an oscillator that calculates the average price gains and losses over a given period the default period is 14 periods with values bounded from 0 to 100 a reading above 70 suggests an overbought condition while a reading below 30 is considered oversold with both potentially signaling a top or a bottom is forming the macd lines however do not have concrete overbought oversold levels like the rsi and other oscillator studies rather they function on a relative basis an investor or trader should focus on the level and direction of the macd signal lines compared with preceding price movements in the security at hand as shown below macd measures the relationship between two emas while the rsi measures price change to recent price highs and lows these indicators are used together to give analysts a more complete technical picture both measure momentum in a market but because they measure different factors they sometimes give contrary results the rsi may show a reading above 70 overbought for a sustained period indicating a market is overextended to the buy side of recent prices in contrast the macd indicates that the market is still increasing in buying momentum either indicator may signal an upcoming trend change by showing divergence from price price continues higher while the indicator turns lower or vice versa limitations of macda moving average divergence can signal a possible reversal but no actual reversal produces a false positive false positive divergences often occur when the price of an asset moves sideways in a consolidation such as in a range or triangle pattern following a trend a slowdown in the momentum sideways movement or slow trending movement of the price will cause macd to pull away from its prior extremes and gravitate toward the zero lines even in the absence of a true reversal confirmation should be sought by trend following indicators such as the directional movement index dmi system and its key component the average directional index adx the adx is designed to indicate whether a trend is in place with a reading above 25 indicating a trend is in place in either direction and a reading below 20 suggesting no trend is in place investors following macd crossovers and divergences should double check with the adx before trading on an macd signal while macd may show a bearish divergence a check of the adx may cite a higher trend in place investors would avoid the bearish macd trade signal and wait to see how the market develops if macd shows a bearish crossover and the adx is in non trending territory 25 and has likely shown a peak and reversal investors could take the bearish trade macd crossoversas shown on the following chart when macd falls below the signal line it is a bearish signal indicating that it may be time to sell conversely when macd rises above the signal line the signal is bullish suggesting that the asset s price might experience upward momentum crossovers are more reliable when they conform to the prevailing trend if macd crosses above its signal line after a brief downside correction within a longer term uptrend it qualifies as a bullish confirmation and the likely continuation of the uptrend image by sabrina jiang investopedia 2022if macd crosses below its signal line following a brief move higher within a longer term downtrend traders would consider that a bearish confirmation image by sabrina jiang investopedia 2022macd divergence