As already mentioned, the MACD indicator consists of two lines, the signal line and the MACD line. 

Here’s how each of the lines typically work:

• MACD Line (the fast line): This is the difference between a short-term Exponential Moving Average (EMA) and a longer-term EMA. The most common configuration is to use a 12-period EMA and a 26-period EMA
• Signal Line (the slow line): This is a 9-period EMA of the MACD line. It is plotted on top of the MACD line to serve as a trigger for buy and sell signals

Additionally, the MACD indicator often includes a histogram, which represents the difference between the MACD line and the signal line.

The indicator is typically plotted below the price chart of an instrument and shows crossover and divergence patterns between the two lines to generate signals. 

Interpretation Of The MACD

Here’s how traders typically interpret the signals generated by the MACD:

• Crossovers: When the MACD line crosses above the signal line, it generates a bullish signal, suggesting that it might be a good time to buy. Conversely, when the MACD line crosses below the signal line, it generates a bearish signal, indicating a potential sell opportunity
• Divergence: Traders also look for divergence between the MACD and the price of the security. For example, if the price of the asset is making new highs, but the MACD is not confirming those highs, it could be a sign that the current trend is losing momentum
• Histogram: The histogram represents the difference between the MACD line and the signal line. Positive values indicate bullish momentum, while negative values suggest bearish momentum

It is important to note that relying solely on the MACD to generate accurate signals is typically not enough over the long term. Traders typically use additional indicators with the MACD, such as Bollinger Bands and the Relative Strength Index (RSI). 

MACD Example 

To better understand how the MACD indicator works in practice, we can look at an example of the indicator plotted below the price chart of Apple Inc stock (AAPL):

As we can see, the MACD and signal lines show convergences during periods of major price movements of the chart. As the MACD is a commonly-followed indicator, traders can anticipate some price movements with this method, as there is a high degree of correlation between the movements of the MACD and the price chart. 

When the histogram turns green, the price is likely to climb, and fall when the histogram turns red. When the MACD and signal lines converge, this can be seen as a buy signal, while divergences show sell signals. 

• The Moving Average Convergence Divergence, or MACD, is a popular technical indicator used by traders
• The indicator consists of two exponential moving averages, a single line, and the MACD line. When the two lines form crossovers and divergences, the indicator generates buy and sell signals, respectively
• The MACD is typically used in conjunction with other indicators, such as the RSI and Bollinger Bands to generate more reliable buy and sell signals
• The indicator is plotted below the price chart and includes a histogram that shows the probability of a crossover or divergence between the signal and MACD lines
• The MACD line is a fast-moving EMA, while the signal line follows behind as a slow-moving EMA. When the lines form a crossover, a buy signal is generated. When the lines diverge, this is a sell signal