1. Overview of MACD

MACD (Moving Average Convergence Divergence) is a technical indicator that uses two moving averages of different periods to visually grasp the strength of trends and potential turning points. It was developed by renowned technical analyst Gerald Appel. This indicator possesses characteristics of a trend-following indicator while also having properties of an oscillator. Due to its simplicity and versatility, it is favored by a wide range of traders worldwide, from beginners to experienced professionals.

2. What are the Components of MACD? The 3 Basics and Divergence

MACD is mainly composed of the following elements, which are combined for market analysis.

2-1. MACD Line

• This is a line connecting the values obtained by subtracting the longer period EMA (typically 26 periods) from the shorter period EMA (Exponential Moving Average, typically 12 periods).
• It suggests the direction of the trend and its momentum.

2-2. Signal Line

• This is the Simple Moving Average (SMA, typically 9 periods) of the MACD line.
• It is used as a signal to suggest buy or sell timings through its cross (intersection) with the MACD line.

2-3. Histogram

• This is a bar graph that displays the difference (divergence) between the MACD line and the Signal line.
• When this difference expands, the bars become longer; when it shrinks, they become shorter. It makes it easier to visually grasp the increase or decrease in trend momentum and the approaching cross between the MACD line and the Signal line.

2-4. Utilizing Divergence

Divergence is a phenomenon where price movement and MACD movement go in opposite directions, suggesting the possibility of a trend reversal.

• Bullish Divergence: A condition where the price makes lower lows (downtrend continues), but the MACD makes higher lows. This is considered a buy signal suggesting that the momentum of the downtrend is weakening and a transition to an uptrend may be imminent.
• Bearish Divergence: A condition where the price makes higher highs (uptrend continues), but the MACD makes lower highs. This is considered a sell signal suggesting that the momentum of the uptrend is weakening and a transition to a downtrend may be imminent.

3. How to Calculate MACD

Each component of MACD is calculated using the following formulas (EMA stands for Exponential Moving Average).

1. MACD Line:

   MACD Line = Short-term EMA (typically 12 periods) - Long-term EMA (typically 26 periods)

   

2. Signal Line:

   Signal Line = Simple Moving Average of the MACD Line (typically 9 periods)

   

3. Histogram:

   Histogram = MACD Line - Signal Line

   

4. Main Usage Methods of MACD

MACD is primarily used as a judgment tool for trading by focusing on the following signals.

4-1. Golden Cross and Dead Cross

The intersection of the MACD line and the Signal line is the most basic buy/sell signal.

• Golden Cross: When the MACD line crosses above the Signal line from below. This suggests a transition to an uptrend or an increase in upward momentum and is generally considered a **buy signal**.
• Dead Cross: When the MACD line crosses below the Signal line from above. This suggests a transition to a downtrend or an increase in downward momentum and is generally considered a **sell signal**.

4-2. Zero Line Crossover

How the MACD line crosses the zero line is also an important point.

When the MACD line **crosses above the zero line from below**, it means that the short-term EMA has risen above the long-term EMA, which can be interpreted as the market transitioning to an upward trend. This is sometimes considered a stronger buy signal.

When the MACD line **crosses below the zero line from above**, it means that the short-term EMA has fallen below the long-term EMA, which can be interpreted as the market transitioning to a downward trend. This is sometimes considered a stronger sell signal.

The histogram is also divided into positive and negative areas with the zero line as the boundary, visually indicating the positional relationship between the MACD line and the Signal line.

5. Practical Examples of MACD

In actual trading, these signals are combined for judgment.

Example of a Buy Signal:

If the MACD line crosses above the Signal line (Golden Cross) and the MACD line is above the zero line (or breaks above the zero line), it may suggest the occurrence of a strong uptrend. Furthermore, if bullish divergence is observed between the price and MACD, it can indicate a more reliable buying opportunity.

Example: If the MACD line crosses above the Signal line while the short-term 12-period EMA is above the long-term 26-period EMA (MACD line is in the positive zone), it suggests the continuation or start of an uptrend.

Example of a Sell Signal:

If the MACD line crosses below the Signal line (Dead Cross) and the MACD line is below the zero line (or breaks below the zero line), it may suggest the occurrence of a strong downtrend. If bearish divergence is confirmed, it can be judged as a more promising selling opportunity.

Example: If the MACD line crosses below the Signal line (Dead Cross) and further shows movement below the zero line, it suggests the possibility that the downtrend is strengthening further.

6. Considerations and Limitations of MACD

MACD is a useful indicator, but it is not foolproof. It should be used with attention to the following points.

• Lagging Nature: Since MACD is calculated based on moving averages, it has a "lagging nature," where signals appear after actual price movements. Especially in markets where prices fluctuate rapidly, the price may have already moved significantly by the time a signal is generated.
• Responsiveness to Volatility (False Signals in Ranging Markets): While it tends to function effectively in markets with clear trends (trending markets), in ranging markets (sideways markets) where prices repeatedly move up and down within a certain range, crosses between the MACD line and the Signal line occur frequently, and there is a tendency for more "false" signals.
• Combined Use with Other Indicators: Instead of judging solely based on MACD signals, combining it with other technical indicators such as RSI (Relative Strength Index), Stochastics, Bollinger Bands, and chart analysis methods like trend lines, support lines, and resistance lines is expected to enhance the accuracy of analysis.

7. Summary

MACD is a very effective technical indicator for discerning the direction and strength of trends, as well as the possibility of reversals. By paying attention to the crosses between the "MACD line" and the "Signal line," the relationship with the "zero line," the increase or decrease of the "histogram," and the occurrence of "divergence," you can capture various buy and sell signals.

Due to its simplicity, it is easy for beginners to use, while also allowing for in-depth analysis, which is why it is used by many traders. However, it is important to understand that MACD also has limitations and should not be relied on solely. Aim for more accurate trading decisions by combining it with other technical indicators, fundamental analysis, and so on.