The MACD indicator is one of the most used indicators in understanding market development. The indicator is based on moving averages and their interrelationship. MACD is an abbreviation for Moving Average Convergence Divergence.
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The MACD indicator is based on three different time parameters, namely time constants for three moving averages. On a long chart, these parameters will be measured in days, but MACD can also be used on shorter charts, e.g., a 1-minute chart. The most commonly used values are 12, 26, and 9 minutes.
It is of course possible to use other values for MACD, but usually, it is recommended to use the standard values used by most traders, as their buying and selling decisions, which are based on these values, push prices further in the right direction.
On a 1-minute chart, MACD is calculated by subtracting a 26-minute moving average from a 12-minute moving average. To this is added a 9-minute moving average, called the ‘signal line’, and when the signal line crosses the other line, it can be interpreted as a buy or sell signals.
MACD is based on the fact that a fast-moving average reacts faster than a slow-moving average. By comparing these averages, MACD can indicate trend reversals in a market. The indicator oscillates within an interval with 0 as the mean value.
An example of how MACD can be used can be seen below in the following screenshot. It is a 15-minute chart showing the oil price (Nymex crude oil) on August 17, 2015. At the top, the price is shown, and below is the MACD indicator.
MACD crosses the signal line twice. If it crosses from below, it is a buy signal; if it crosses from above, it is a sell signal.
Some traders also see it as a signal when MACD moves above or below the 0-line, as it indicates how the shorter moving average relates to the long ones. When MACD is above 0, the shorter moving average is above the longer, which signals upward momentum. The opposite is the case when MACD is below 0. By looking back at the chart historically, one can get an idea of whether it seems effective to use this indication as buy and sell signals at a given time.
MACD can also be used in the same way as the stochastic oscillator. This means that one looks at when MACD moves differently than the price. For instance, if there is a double bottom in the price, while MACD has a rising bottom, it shows that the momentum is upward, which can be interpreted as a buy signal.