If we take 26 EMA and imagine that it is a flat line, then the distance between this line and 12 EMA would represent the distance from MACD line to indicator's zero line.
The further MACD line goes from zero line, the wider is the gap between 12EMA and 26 EMA on the chart. The closer MACD moves to zero line, the closer are 12 and 26 EMA.
At vertical line 1, the MACD is negative i.e. below zero indicating 26 EMA (red) is above 12 EMA (blue) and with a high negative value indicating a large difference between the 12 and 26 EMA.
At vertical line 3, the MACD is positive indicating the 12 EMA is above 26 EMA and the MACD is further away from zero line indicating a large difference between 12 and 26 EMA.
When MACD (blue) cross over zero it indicate the 12 EMA has cross over the 26 EMA. Refer to vertical line 2 and 4.
MACD generates a bullish signal when it moves above its trigger line, and it sends a sell sign when it moves below its trigger line.
A crossover of the bar over zero level indicates a crossover of MACD over its trigger line. Refer to vertical line 5.
Confirmation of bullish signal is when the MACD crossover the zero level from negative position and vice versa for bearish confirmation with MACD moves below zero level from above.
MACD line (blue in chart 2) forms highs and lows. When we have an uptrend, they form higher highs and when we have a downtrend, they form lower highs and when the MACD line goes under the zero level, they form lower lows.
MACD Divergence:
MACD Divergence is one of the most famous and strongest trading signals that MACD generates. MACD Divergence forms when the price goes up and makes higher highs and at the same time, MACD bars go down and make lower highs.
The rule says, the price will finally follow the MACD direction and will break down. However, the problem is, you never know when the price will follow the MACD direction. So, if you rush and take a short position right when you see a MACD Divergence, it may keep on going up for several more candles. You should go short when MACD Divergence is followed by a good sell signal by the candles and/or a support break down. This is safer.
MACD Divergence can be seen at the end of uptrends. What does it mean? It means if you are a trend trader, you should not go long when you see that a MACD Divergence is formed. It can collapse at any time.
MACD Convergence:
MACD Convergence is also a famous signal but people trust the MACD Divergence more because when the market goes down and collapses, it goes faster and stronger. Fear is stronger than greed and when market goes down, fear is the dominant emotion.
MACD Convergence forms when price goes down and forms lower highs or lower lows but at the same time MACD bars go up and form higher highs or higher lows. The rule says, the price will finally change the direction and will follow MACD which means it goes up. MACD Convergence can be seen at the end of downtrends. What does it mean? It means if you are a trend trader, you should not go short when you see that a MACD convergence is formed. It can jump up at any time.
