Definition
MACD (Moving Average Convergence Divergence) is a momentum and trend-following indicator that measures the relationship between two exponential moving averages — typically the 12 and 26 EMA — and plots the difference (MACD line) alongside a 9-period signal line and a histogram showing the gap between them.
Example
“The MACD crossed above the signal line as the stock held VWAP — that crossover with the histogram flipping positive was my confirmation that momentum was shifting, and I entered long.”
Detailed Explanation
MACD works by measuring momentum through the divergence (or convergence) of two EMAs. When the faster 12-period EMA is above the slower 26-period EMA, MACD is positive — short-term momentum is stronger than longer-term momentum. The signal line (9-period EMA of MACD) smooths the indicator and creates the crossover signals traders watch. When MACD crosses above the signal line, that's a bullish signal; below is bearish. The histogram amplifies this by showing the distance between the two lines — expanding bars mean the gap is widening (momentum strengthening), contracting bars mean it's narrowing (momentum fading).
The most useful MACD signal for many traders isn't the crossover itself but divergence — when price makes a new high but MACD makes a lower high (bearish divergence), it suggests the move is losing steam beneath the surface. Vice versa, when price makes a new low but MACD makes a higher low (bullish divergence), it suggests downside momentum is weakening. These divergence setups often precede reversals and can give you an early warning that a trend is running out of fuel before the price action makes it obvious.
The limitation of MACD is that it's a lagging indicator — it's built from moving averages, which by definition trail price. In fast, volatile intraday trading, MACD signals can come well after the move has already happened. It's better used on higher timeframes (15-minute, 1-hour, daily) to confirm the direction of a trend rather than as a precision entry trigger on 1-minute charts. Use it for context (is momentum with me or against me?) rather than trying to time exact entries and exits off the line crossovers.