The Moving Average Convergence Divergence (MACD) measures the relationship between two exponential moving averages (typically 12 and 26 period). The MACD line is the difference between these EMAs, and the signal line is a 9-period EMA of the MACD. The histogram shows the distance between MACD and signal lines. MACD is a hybrid trend-following and momentum indicator.
MACD line: 12 EMA - 26 EMA. Signal line: 9 EMA of MACD. Histogram: MACD - Signal line. Bullish crossover: MACD crosses above signal. Bearish crossover: MACD crosses below signal. Zero line cross: trend direction change. MACD divergence: analogous to RSI divergence.
Bullish crossover below the zero line = buy signal, Bearish crossover above the zero line = sell signal, MACD divergence from price at extremes = reversal setup, Zero line cross for trend direction confirmation
Enter on crossover, exit on opposing crossover or divergence. MACD histogram turning from expanding to contracting = momentum fading. Zero line as stop-loss reference for trend trades.
MACD works best on 1H, 4H, and Daily timeframes. Too noisy on very short timeframes.
MACD is a lagging indicator — it generates signals AFTER the move has started. Use MACD for confirmation, not as a primary entry signal. Pairing MACD with support/resistance or price action dramatically improves results.
Support and resistance (S/R) levels are price zones where buying or selling pressure has historically prevented the price from continuing in its current direction. Support is a floor where buying emerges; resistance is a ceiling where selling appears. S/R levels are the foundation of technical analysis and provide the framework for every trade setup.
Gaps occur when price opens significantly above or below the prior close, leaving an unfilled space on the chart. Gap trading strategies exploit the tendency for gaps to either fill (price returning to close the gap) or continue (price extending in the gap direction). Understanding gap types — common, breakaway, runaway, and exhaustion — helps traders determine whether to fade the gap or trade its continuation.
Trend lines connect swing lows (uptrend) or swing highs (downtrend) to define the trend direction and provide dynamic support/resistance. Channels add a parallel line to create a trading range within the trend. Trend line breaks signal potential trend changes. Valid trend lines require at least two touches, with three or more being more significant.
Bollinger Bands consist of a middle band (20 SMA by default) and upper/lower bands set at 2 standard deviations from the middle. The bands expand during high volatility and contract during low volatility. The squeeze (narrow bands) often precedes a significant move, making Bollinger Bands excellent for volatility-based setups.