Trading strategy · Momentum
MACD Momentum
Spot momentum shifts before the crowd.
▶ Watch the free video lesson with TomWhat it is
The MACD (Moving Average Convergence Divergence) is the difference between a 12 and a 26-period exponential moving average, with a 9-period signal line. When the MACD line crosses above its signal line, short-term momentum is accelerating upward. The histogram shows the gap between the two lines and helps you see momentum building or fading.
How it works
- MACD line = 12 EMA − 26 EMA. Signal line = 9 EMA of the MACD line. Histogram = MACD − signal.
- Buy signal: the MACD line crosses above the signal line.
- Stronger signals happen below the zero line after a decline (momentum turning from deeply negative).
- Histogram bars growing = momentum strengthening; shrinking = momentum fading.
- Exit when MACD crosses back below the signal line, or trail a stop.
The rules
| Entry | MACD line crosses above signal line, ideally below zero after a decline. |
|---|---|
| Stop loss | Below the most recent swing low. |
| Exit | MACD crosses back below signal, or histogram shrinks for several bars. |
| Filter | Confirm with price making a higher low. |
Pros
- Combines trend and momentum in one tool
- Earlier than simple MA crosses
- Histogram gives a visual of momentum
Cons
- Still lagging
- Many signals in choppy markets
- Crosses near zero can be noisy
Common mistakes
- Taking every cross regardless of context
- Ignoring price structure
- Treating MACD as a prediction rather than confirmation
Lesson transcript
Lesson five: MACD momentum. The MACD is one of the most popular indicators in the world, because it combines trend and momentum into one picture. Let's build it. The MACD line is the difference between a twelve period and a twenty six period exponential moving average. The signal line is a nine period average of the MACD line. And the histogram shows the gap between them. Here's a market in a steady decline. In the lower panel, the blue MACD line is below zero and below its orange signal line. Momentum is clearly negative. Then selling slows down. The histogram bars shrink. And right here the MACD line crosses above the signal line, below zero. Momentum is turning up from a washed-out level. That's our buy. Stop goes below the swing low. Now watch the histogram. As price rallies, the green bars grow. That tells us momentum is strengthening, and we stay in. Later, the bars shrink and the lines come back together. Momentum is fading. When the MACD crosses back below its signal line, we exit and lock in the move. The rules. Buy when MACD crosses above the signal, ideally below zero. Stop under the swing low. Exit on the opposite cross. And confirm with price. A higher low on the chart makes the signal much stronger. Recap. The MACD is a confirmation tool, not a crystal ball. Use it with price structure, and it helps you see momentum shift early. Next up, the volatility squeeze.
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