Guide to Using the MACD Indicator on eToro

What is the Moving Average Convergence Divergence indicator?

MACD on eToro

MACD is constructed by taking the difference between the ‘slow’ moving average indicator of 26-day period and a ‘fast’ moving average of a 12-day period; moving averages are constructed from the closing price of the asset and therefore actually depend on the price level of that security.

This indicator you see on eToro is made up of 2 lines that move on either side of the zero line: the MACD line and the ‘signal’ line, which is a 9-day period exponential moving average.

Trading using MACD

Signals of MACD come mostly from the divergence (when moving averages are drifting away from each other) or convergence (MA’s moving into the same direction towards each other) of the fast and the slow moving averages, just like the name suggests. Because the 12-day moving average smoothes prices over a shorter time period it reacts to changes in prices faster than the 26 exponential moving average.

The convergence or divergence of these two moving averages that make up the MACD indicator can then be interpreted as a signal that there is possibility of a trend developing and that you may consider entering a buy or a sell position. You can do so by observing the interaction of the MACD indicator and the zero line. MACD moves around the zero line and when it is positive (above the zero line), this indicates that the 12-day period moving average is above the 26-day one and there is a positive momentum in the upward direction is developing. This could be an opportunity for a buy trade. When the MACD line is negative (below the zero line) there is a downward momentum strengthening and this could be an opportunity for a sell position.

You can also interpret the interaction between the MACD and the signal line (which is the 9-day moving average); the signal line facilitates spotting turns in the MACD indicator. A bullish signal can be inferred when the MACD crosses the signal line from below and upwards and a bearish signal can be inferred from the indicator falling downwards through the signal line. You should beware however that when these crossovers happen at extreme positives and negatives; these could be caused be extreme volatilities and be over-predictive of momentum.

Also note that there is a histogram created for the MACD indicator which graphically charts the difference between the MACD line and the signal line. The histogram is positive for the periods when the MACD indicator line is moving above the signal line and negative when it is below.

Divergence of MACD