MACD and Bollinger Bands
Lesson 15 of 23 in the course “Technical Analysis”. Free, with animations and a quiz.
MACD
MACD was created by Gerald Appel in the late 1970s. It’s the difference between EMA 12 and EMA 26: the MACD line. Smoothing it with EMA 9 gives the signal line. The histogram shows the distance between them. The 12, 26, 9 settings are TradingView’s defaults, and almost all traders keep them.
Momentum and its fatigue
MACD is a momentum indicator. Crossing the signal line from below says upward momentum is growing. Being above zero says the fast average is above the slow one. Shrinking bars are especially useful: momentum often fades before price turns. But in a range MACD saws and gives false signals, so look at the trend first.
Bollinger Bands
John Bollinger created his bands in the 1980s. In the middle is a 20-candle average, and above and below are bands two standard deviations away. Deviation grows when the market swings hard, so the bands widen in volatility and narrow in calm. Most closes sit inside the bands.
Squeeze, walk and reversion
The bands’ most valuable signal is the squeeze. When they narrow to their tightest in a long time, the market is storing energy, and a strong move often follows. The breakout shows the direction. In a trend price can ride the upper band for a long time: that’s strength. In a range a band touch often sends price back to the middle. As with RSI, touching a band is not an order to sell.
Check yourself
- What is the MACD line made of?
Correct answer: The difference between EMA 12 and EMA 26. MACD = EMA 12 − EMA 26. Its EMA 9 is the signal line, and the gap between them is the histogram. - The Bollinger Bands squeezed tighter than in months. What to expect?
Correct answer: A strong move soon; the breakout shows the direction. Calm in the market rarely lasts forever. A squeeze says energy is building, not which way it goes. - Price in an uptrend rides the upper band for several candles. What does it mean?
Correct answer: The trend is strong; it’s not a sell signal. Riding the band is a sign of a strong trend. A band touch isn’t an order, it describes how fast price is moving.