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Momentum Indicators

MACD - Moving Average Convergence Divergence

Learn how MACD works, signal line crossovers, histogram interpretation, and how GarudaAlgo uses MACD for trend-following signals.

What is MACD?

The Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator developed by Gerald Appel in the late 1970s. It reveals changes in the strength, direction, momentum, and duration of a trend.

The Three Components

MACD Line

12 EMA - 26 EMA

Signal Line

9 EMA of MACD

Histogram

MACD - Signal

MACD Calculation:

MACD Line = 12-period EMA - 26-period EMA
Signal Line = 9-period EMA of MACD Line
Histogram = MACD Line - Signal Line

The standard settings (12, 26, 9) are optimized for daily charts but work well across all timeframes.

How to Interpret MACD

1. Signal Line Crossovers

The most common MACD signal. When MACD crosses above the signal line, it's bullish. When it crosses below, it's bearish.

Bullish Crossover

MACD line crosses above the signal line. Best when occurring below the zero line.

Bearish Crossover

MACD line crosses below the signal line. Best when occurring above the zero line.

2. Zero Line Crossovers

  • MACD crosses above zero: Short-term momentum is now bullish (12 EMA > 26 EMA)
  • MACD crosses below zero: Short-term momentum is now bearish (12 EMA < 26 EMA)

3. Histogram Analysis

  • Growing histogram bars: Trend is strengthening
  • Shrinking histogram bars: Trend is weakening (potential reversal)
  • Color change: Histogram crossing zero = MACD/Signal crossover

4. MACD Divergence

  • Bullish Divergence: Price makes lower low, MACD makes higher low → Potential reversal up
  • Bearish Divergence: Price makes higher high, MACD makes lower high → Potential reversal down

How GarudaAlgo Uses MACD

GarudaAlgo Enhancement

GarudaAlgo analyzes MACD across multiple timeframes and combines crossover signals with histogram momentum for more reliable entries. We also detect early histogram slope changes before the actual crossover.

MACD Weight in Signal System

MACD analysis contributes 9% to the overall signal confidence (combined with RSI as part of momentum analysis).

What GarudaAlgo Analyzes

  • Signal Line Crossovers: Both bullish and bearish with timing optimization
  • Zero Line Position: Whether MACD is above or below zero
  • Histogram Momentum: Increasing or decreasing bars
  • Histogram Slope: Early detection of momentum shift
  • MACD Divergence: Regular divergence patterns
  • Multi-timeframe Confirmation: MACD alignment across M15, H1, H4
Parameter Default Value Description
Fast EMA 12 Fast moving average period
Slow EMA 26 Slow moving average period
Signal Period 9 Signal line smoothing period

Trading Strategies

Strategy 1: Classic Crossover

  1. Wait for MACD to cross signal line
  2. Confirm with histogram changing direction
  3. Enter in direction of the crossover
  4. Exit on opposite crossover or when histogram starts shrinking

Strategy 2: Zero Line + Crossover

  1. Determine trend bias from MACD position relative to zero
  2. Only take bullish crossovers when MACD is near or above zero
  3. Only take bearish crossovers when MACD is near or below zero
  4. This filters out low-probability counter-trend signals

Strategy 3: Histogram Divergence

  1. Look for divergence between price and MACD histogram
  2. Wait for histogram to start moving in expected direction
  3. Enter when signal line crossover confirms
  4. This provides earlier entries than waiting for MACD line divergence

Best Practices

  • MACD is lagging — It's based on moving averages, so it confirms trends rather than predicts them
  • Works best in trending markets — In ranges, MACD can give many false signals
  • Use histogram for early signals — Histogram changes direction before crossovers
  • Combine with support/resistance — Crossovers at key levels are more significant
  • Watch for divergence in extended trends — Divergence often precedes reversals