Recently, a friend asked me how to use MACD, and I realized that many people only have a superficial understanding of this indicator. Instead of just explaining buy and sell signals, it's better to clarify the MACD formula and the underlying logic, so you can truly understand its value.

First, let's talk about what MACD is. Its full name is Moving Average Convergence Divergence. The Chinese translation is smooth moving average of convergence and divergence. The core idea is quite simple: use three components (the fast line DIF, the slow line DEA, and the energy histogram) to capture price trends and momentum changes.

To understand the MACD formula, you first need to understand EMA (Exponential Moving Average). Unlike the simple moving average, EMA gives more weight to recent prices and reacts more sensitively. The calculation method is: today's closing price multiplied by the smoothing factor α, plus yesterday's EMA multiplied by (1−α). Where α = 2 ÷ (N+1), and N is the period you choose. For example, for a 12-period EMA, α is 2 ÷ 13 ≈ 0.1538.

The fast line DIF is calculated as EMA(12) minus EMA(26). The difference between the short-term EMA and the long-term EMA quickly reflects the market's short- and long-term momentum comparison. When DIF is positive, it indicates short-term strength over long-term, signaling a bullish trend; when negative, it indicates a bearish trend. This MACD formula is cleverly designed to use the difference between two EMAs of different periods to determine the trend.

The slow line DEA is EMA of DIF over 9 periods, smoothing the DIF curve further to filter out short-term noise. When DIF crosses above DEA, it's called a golden cross (buy signal); when it crosses below, it's called a death cross (sell signal). I personally pay the most attention to these crossovers in live trading.

The energy histogram is calculated as DIF minus DEA. Positive bars indicate increasing bullish momentum; negative bars indicate bearish dominance. When the histogram gradually converges, it may signal a trend reversal. Some platforms amplify the histogram for easier observation, but that doesn't change the essence.

I once tested the MACD formula on Binance's ETHUSDT chart. At that time, EMA 12 was 4271.55, EMA 26 was 3941.88, so DIF was 329.67. Then, applying the MACD formula to calculate DEA: today's DIF multiplied by 0.2 plus yesterday's DEA multiplied by 0.8, resulting in 266.62. Finally, Histogram = 329.67 − 266.62 = 63.05. The entire derivation process is basically like this.

A classic example is ETH on April 13, 2024, when DIF crossed above DEA to form a golden cross, directly initiating a bull market. Conversely, the death cross on December 9 of the same year led to a retracement of over 60%. That’s why many traders are so interested in the MACD formula—it can indeed reflect some reversals in advance.

However, it's important to note that MACD is not a holy grail. No indicator guarantees 100% accuracy, and MACD also has lag and noise. My suggestion is to combine it with other technical analysis tools to improve success rates. Additionally, MACD parameters can be adjusted: for short-term trading, use (5,13,5); for long-term, use (50,200,20). Find the most suitable settings through backtesting based on your trading style.

Honestly, understanding how the MACD formula works is much more useful than just memorizing buy and sell signals. If you're interested in this, I recommend opening a chart and deriving it yourself—calculate it manually once to truly grasp the concept.