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Intermediate3 min readTechnical Indicators · 5/16

The MACD Indicator

MACD looks complicated: two lines, some bars and a zero line. But it is all built on one idea, the distance between two moving averages, one fast and one slower. Understand that distance and you understand the whole picture.

What you will learn

  • Know the three parts: the MACD line, the signal line and the histogram.
  • Calculate a MACD reading in a worked example.
  • See why MACD values cannot be compared between two stocks.
The lesson as a short video · 20 seconds · Watch on YouTube
In this lesson
  1. Three parts, one idea
  2. What each part describes
  3. Why not compare MACD between stocks?
  4. Check yourself
  5. Summary
  6. Related terms

Three parts, one idea

MACD lineA 12-session EMA minus a 26-session EMA. That is the usual setting.
Signal lineA 9-session EMA of the MACD line itself, so it trails it more calmly.
HistogramThe bars: the distance between the MACD line and the signal line.
MACD lineSignal lineHistogramZero line
The bars grow as the two lines separate and shrink as they converge.

What each part describes

A MACD line above zero means the fast average is above the slow one: recent prices are higher than slightly older ones. Below zero means the reverse. The further the line is from zero, the wider the gap between the averages.

The histogram describes the distance between the MACD line and the signal line. If the positive bars grow, MACD is pulling further above its signal line. If they shrink, MACD is still above the signal line but the two are converging. That can happen while the price is still rising, so it does not mean the rise has stopped.

Worked exampleFor an invented stock, the 12-session EMA is 10.60 and the 26-session EMA is 10.20. So the MACD line = 10.60 − 10.20 = 0.40. If the signal line is 0.30, the histogram = 0.40 − 0.30 = +0.10. If tomorrow it reads +0.06, MACD is still above the signal line, but the distance between them is narrowing.

Why not compare MACD between stocks?

MACD is measured in currency, not in percent. A gap of 0.40 on a 10 EGP stock is 4%, while the same gap on a 100 EGP stock is only 0.4%. So a big MACD on a high-priced stock does not mean a stronger move than on a cheap one. Compare each stock with its own history.

Watch outMACD is built from averages, so it lags the price just as they do. A crossing of the two lines is not a buy or sell instruction. In a sideways market the lines cross often without describing any real trend.

Read MACD on a chart

Open any stock chart on FoudaLens, add the MACD pane, and check whether the bars grew or shrank over the last two weeks.

Browse stocks

Check yourself

1. EMA 12 = 20.50 and EMA 26 = 20.00. What is the MACD line?

MACD = fast − slow = 0.50.

2. The bars are positive but shrinking day after day. What does that describe?

The histogram measures the distance between the lines, not the direction of price itself.

Summary

  • The MACD line is the difference between a fast and a slower EMA.
  • The histogram describes whether the distance between the MACD line and its signal line is widening or narrowing.
  • MACD is in currency and lags price, so compare a stock with its own history and never read a cross as an instruction.

Related terms

MACDMoving average

Related lessons

Technical IndicatorsMoving Averages: SMA vs EMATechnical IndicatorsDivergence Between Price and an Indicator
Previous · 04The Relative Strength Index (RSI)Next · 06How to Use RSI and MACD Together

Educational content only, not investment advice. Companies and figures in the examples are invented for illustration.