5-Minute Indicators: What is MACD

Series Note: This is part of our "5-Minute indicator guide" series, where we break down complex trading tools into actionable insights you can digest in one coffee break.

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⚡ The Quick Summary

• What: A trend-following momentum indicator that shows the relationship between two moving averages.
• Why: It helps traders identify trend direction, strength, and potential reversal points.
• How: Use crossovers (MACD line vs. Signal line) or Divergences to find entry and exit points.

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1. WHAT: The Components

The Moving Average Convergence Divergence (MACD) was developed to turn simple moving averages into a more responsive momentum tool. It consists of three moving parts:

• The MACD Line: The difference between the 12-period EMA and the 26-period EMA.
• The Signal Line: A 9-period EMA of the MACD Line itself. It acts as the "trigger."
• The Histogram: The vertical bars showing the gap between the MACD and Signal lines.

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2. WHY: Why Use It?

The MACD is the "Swiss Army Knife" of technical analysis because it provides two types of data at once:

1. Trend Direction: Is the market moving up or down? (Position relative to the Zero Line).
2. Momentum Strength: Is the trend accelerating or slowing down? (The width of the Histogram).

Unlike a single Moving Average which only shows price direction, MACD tells you the "velocity" of the price movement.

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3. HOW: The Strategy

To keep it under 5 minutes, focus on these three high-probability signals:

A. The Signal Line Crossover

• Bullish: MACD Line crosses above the Signal Line (Time to buy).
• Bearish: MACD Line crosses below the Signal Line (Time to sell).

B. The Zero-Line Crossover

• Bullish: When the MACD Line moves above the Zero Line, it confirms the short-term trend has turned positive.
• Bearish: Below the Zero Line confirms a negative trend.

C. Divergence (The "Early Warning")

• If the price hits a Higher High but the MACD hits a Lower High, the trend is losing steam and a reversal may be coming.

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💡 The "Pro Tip" for This Series

Don't chase every crossover. The MACD is most effective when the market is trending. In a "sideways" or "choppy" market, the MACD will produce many "fakeouts" (false signals). Always look at the higher timeframe (e.g., Daily) to confirm the trend before taking a signal on a lower timeframe (e.g., 1-Hour).