Moving Average Convergence/Divergence (MACD) is a trend-following oscillator technique which uses 2 exponential moving averages and was developed by Gerald Appel in the late 1970’s. As all momentum indicators, the MACD gives an idea about the general direction of an asset’s price.
The MACD line is the result of subtracting the long term 26-period Exponential Moving Average (EMA) from the short term 12-period EMA. An additional line called the “signal line” is plotted on the top of the MACD line.
The “signal line” is nothing but a 9-period EMA of the MACD and serves as a trigger for buy and sell signals. Traders may buy the asset whenever the MACD crosses above its signal line and sell the asset whenever the MACD crosses below its signal line. The difference between the MACD line and the signal line is usually shown through bar histograms, where positive values indicate an upward trend, while negative values indicate a downward trend.
The size of the bar histogram which reflects the distance between the MACD line and the signal line gives an indication about the velocity of the movement. Crossovers of the centerline of the histogram indicate buy and sell signals.
Crossovers towards the positive side of the histogram indicate a buy signal while a crossover towards the negative side indicates a sell signal.
One of the most popular ways to use the MACD histogram is to trade divergence. However, the divergence trade is not always very accurate; in fact, its success rate is below 50%. In order to explore a more logical way of trading the MACD divergence we look at using the MACD histogram for trade entry and trade exit signals (instead of focusing on entry only), this gives traders a unique edge to take advantage of such a strategy.