MACD explained: line, signal, histogram and what each one tells you

What it measures

MACD measures the distance between a fast and a slow exponential average of price. When the fast average is above the slow one the recent trend is stronger than the older one, and the indicator is positive.

It is a momentum measure derived from trend-following averages, which is why it lags — and why the histogram, which measures the rate of change of that distance, turns before the lines cross.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   Compute an exponential average of the source over the fast period and another over the slow period, each seeded with the simple average of its first values.

2. 2

   Subtract the slow average from the fast one. That difference is the MACD line.

3. 3

   Take an exponential average of the MACD line itself over the signal period. That is the signal line.

4. 4

   Subtract the signal from the MACD line. That difference is the histogram.

Settings

Twelve, twenty-six and nine come from a daily-chart era and survive mostly by convention. They are not sacred, but they are what other people are watching. If you shorten them, shorten all three proportionally rather than one alone.

How to read it

• The zero line separates regimes: above it the fast average is ahead of the slow one. Crossings of zero are slower and more meaningful than crossings of the signal.
• A signal-line crossover is the earliest event MACD produces and the least reliable. On a choppy market it fires constantly.
• The histogram shrinking while price still advances is momentum leaving the move before price reflects it.
• MACD is unbounded, so its absolute value is comparable across time on one instrument but not across instruments at different prices — use PPO for that.

Where it misleads

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