MACD — two averages, arguing

What this is about

MACD looks more sophisticated than it is. Three lines, a histogram, an intimidating acronym — and underneath, two moving averages subtracted from each other. Once you see that, the whole indicator becomes readable, including its limits.

How it is built

MACD line = a 12-period exponential moving average minus a 26-period one.

An exponential average weights recent prices more heavily than old ones, unlike the simple averages in lesson 2. Otherwise the idea is identical.

So the MACD line measures the gap between a fast average and a slow one:

• Above zero — the fast average is above the slow one; recent prices have been running above older ones.
• Below zero — the reverse.
• Rising — the gap is widening.
• Falling — the gap is closing.

Signal line = a 9-period average of the MACD line. An average of an average, and therefore slower still.

Histogram = MACD line minus signal line, drawn as bars. When the bars grow, the gap is widening; when they shrink, it is closing; when they cross zero, the two lines have crossed.

That is the entire indicator. Nothing else is in there.

Reading it honestly

The histogram is the most useful part, and for a reason worth stating: it is the rate of change of the gap. It tends to shrink before the lines cross, because it is measuring the closing of the distance that produces the cross.

That makes it slightly earlier than the crossover — and "slightly earlier" is not the same as "early". Everything here is built from averages, and averages lag by construction. MACD is a lagging indicator assembled from lagging parts, and no arrangement of them changes that.

The standard reading:

• MACD crosses above signal — the fast average is pulling away upward.
• MACD crosses below signal — the reverse.
• MACD crosses zero — the 12 and 26 averages themselves have crossed.
• Histogram shrinking — whatever has been happening is losing pace.

Each of those is a description of the arithmetic. None is a forecast.

Where it is genuinely useful

Seeing momentum fade while price still rises. Price makes a new high, the histogram peaks lower than last time: the latest advance is being driven less forcefully than the previous one. That is a real observation and the best thing MACD does.

The same warning as RSI divergence applies, and applies here too: it happens often, resolves in all directions, and is much easier to see afterwards.

Comparing pace across time on one share. Is this move stronger or weaker than the last one? MACD answers that reasonably.

Where it fails

Sideways markets. The two averages sit on top of each other and cross repeatedly. Every crossing looks like a signal. Traded, each is a spread paid.

Sharp reversals. By the time averages of averages have turned, a fast move is well advanced. MACD will not get you out of a gap — see Stop loss.

Comparing between shares. MACD is in the share's own price units, so a value of 3 means something different on a £20 share than on a £500 one. It is not comparable across companies, and any list ranking companies by raw MACD is doing something meaningless.

What this does not tell you

It does not tell you strength, only difference. A large MACD value means the two averages are far apart, which happens on a big move and also on an expensive share. Distance is not conviction.

It does not contain volume. A move on almost no trading and the same move on heavy trading produce identical MACD.

It does not know why. Results, an index rebalance, one large seller — all identical to the arithmetic.

It is not independent confirmation of RSI. Both are functions of the same recent closes. When they agree, that is substantially the same information counted twice, and treating agreement as corroboration is the most common way this chapter gets misused.

Where to see this in the app

Chart → MACD draws all three parts in a panel beneath the price: the MACD line, the signal line, and the histogram.

The exercise worth doing once: put the 12 and 26-day averages on the price itself, then look at the MACD line below. Watch the line rise exactly when the two averages separate and fall when they converge. After seeing that once, MACD stops being an oracle and becomes a distance meter — which is the correct mental model and is hard to unsee.

Chart → Technicals includes MACD in its summary alongside RSI and the moving averages. Both feed the same reading, which is precisely why that reading is presented as a reading and not as a recommendation.