MACD

10.1 Two indicators in one

Mint now understood moving averages (Chapter 8) and momentum (Chapter 9). Hash introduced an indicator that combines both.

"MACD takes two moving averages, measures the gap between them, and shows you whether that gap is growing or shrinking," Hash said. "It's a trend indicator and a momentum indicator in one."

MACD stands for Moving Average Convergence Divergence. It's one of the most popular indicators in every market, including crypto.

10.2 The three parts

MACD has three components, using standard settings of 12, 26, and 9.

Component	Calculation	What it shows
MACD line	12-period EMA minus 26-period EMA	The gap between a fast and slow average
Signal line	9-period EMA of the MACD line	A smoothed version of the MACD line
Histogram	MACD line minus signal line	Whether momentum is accelerating or slowing

Chapter 10 · MACD, signal line, and histogram

The top panel shows the MACD line (12-period EMA minus 26-period EMA) as a solid line and the signal line (9-period EMA of the MACD line) as a dashed line around a zero line. Where the MACD line crosses below the signal line, a bearish cross is marked; where it crosses back above, a bullish cross is marked. The bottom panel shows the histogram, MACD minus signal, as bars: solid green bars above zero while MACD is above the signal line, dashed red bars below zero while it is below. Vertical guides show each crossover lining up with the histogram changing sign, and the bars shrink toward zero before each cross.

Here's an example, with illustrative values for Bitcoin on a given day:

	Value
12-day EMA	$101,200
26-day EMA	$100,500
MACD line	$101,200 − $100,500 = $700
Signal line	$550
Histogram	$700 − $550 = $150

10.3 Reading the MACD line

Above zero: the 12-day EMA is above the 26-day EMA. Short-term prices are higher than longer-term prices, indicating upward momentum.

Below zero: the 12-day EMA is below the 26-day EMA, indicating downward momentum.

Rising: the gap is widening upward, so bullish momentum is strengthening.

Falling: the gap is shrinking or widening downward, so bullish momentum is weakening or bearish momentum is strengthening.

In the example, the MACD line is positive at $700, meaning short-term momentum is bullish.

Note that MACD values are in price units, so they depend on the asset's price. A MACD of 700 means something very different for Bitcoin than for a token priced at $2. You can't compare MACD values across assets, only the shape and direction for one asset.

10.4 Signal line crossovers

The most common MACD signal is a crossover between the MACD line and the signal line.

Crossover	Meaning
MACD crosses above the signal line	Momentum turning more bullish
MACD crosses below the signal line	Momentum turning more bearish

Crossovers above the zero line, during an established uptrend, are generally considered stronger bullish signals than those below zero. And crossovers below zero, in a downtrend, are stronger bearish signals.

Like moving average crossovers (Chapter 8), MACD crossovers are lagging and produce whipsaws in choppy markets.

10.5 The histogram

The histogram is the bar chart around the zero line, showing the difference between the MACD and signal lines. It's often the earliest part of MACD to change.

Histogram behaviour	Interpretation
Bars growing above zero	Bullish momentum accelerating
Bars shrinking above zero	Bullish momentum slowing; a bearish crossover may come
Bars growing below zero	Bearish momentum accelerating
Bars shrinking below zero	Bearish momentum slowing; a bullish crossover may come

In Mint's example, the histogram is positive at $150. If it was $250 yesterday and $150 today, bullish momentum is still present but slowing.

"So the histogram is like watching a car's acceleration, not just its speed," said Mint.

"Exactly," said Hash. "MACD tells you the speed difference. The histogram tells you whether that's increasing or decreasing."

10.6 Divergence

Like RSI, MACD can show divergence:

Bearish divergence: price makes a higher high, but MACD makes a lower high.

Bullish divergence: price makes a lower low, but MACD makes a higher low.

The same cautions from Chapter 9 apply. Divergence is a warning, not a signal to act immediately. It works best when confirmed by price action, such as a break of structure or a reversal candle at a key level.

10.7 Strengths and weaknesses

Strengths	Weaknesses
Combines trend and momentum in one view	Lags, because it's built from moving averages
Clear visual signals	Whipsaws in ranges
Histogram can give early warnings	Values aren't comparable across assets
Works across timeframes	Default settings may not suit every market

Some crypto traders adjust MACD settings, especially because crypto trades seven days a week. There's no universally better setting, and changing settings to fit past data often makes results worse in the future, a problem called overfitting. For most traders, the default settings are a reasonable starting point, especially because they're what most others use.

10.8 Putting it together

Hash showed Mint how MACD might fit into an analysis:

1. Trend check: price is above the rising 50-day SMA, and MACD is above zero. Bullish context.
2. Pullback: price pulls back to a support zone, and the MACD histogram shrinks toward zero.
3. Signal: a bullish engulfing candle forms at support, and the MACD line crosses back above the signal line, above zero.
4. Confluence: trend, support, candle pattern, and momentum all agree.

"No single indicator decided it," said Mint.

"That's the point," said Hash. "Each tool adds a bit of evidence."

10.9 Try it yourself

Add MACD with default settings to a daily Ethereum chart. Mark every crossover over the last six months. Separate them into crossovers above zero and below zero, and note which were followed by meaningful moves. Then look at the histogram before each major turn and see whether it shrank before the crossover happened.

Key takeaways from this chapter

1. MACD measures the gap between the 12-period and 26-period EMAs, with a 9-period signal line.
2. MACD above zero indicates upward momentum; below zero, downward momentum.
3. Crossovers between the MACD and signal lines show momentum shifts, and are stronger when aligned with the trend.
4. The histogram shows whether momentum is accelerating or slowing, often before a crossover.
5. MACD divergence is an early warning that needs confirmation.
6. MACD lags, whipsaws in ranges, and isn't comparable across assets.
7. Default settings are a sensible starting point; adjusting them to fit past data risks overfitting.