MACD

MACD means Moving Average Convergence Divergence and it is a trend-following momentum indicator. It was developed by Gerald Appel in the late 70s.

 

MACD at a Glance

  • Name: Moving Average Convergence Divergence (MACD)
  • Usage: Identifies Price Trend and Forecasts Reversals
  • Trading Signals: When there is an important divergence between the price slope and the MACD slope, a price reversal may be on the way
  • Timeframes: Best used in 30-Minute, 1-Hour, 4-Hour, and Daily charts
  • Standard Settings: 12,26,9
  • Crucial Levels: In general it is crucial when the MACD Line crosses up or down the Signal Line

The MACD is a truly leading indicator and that means that it is able to identify the beginning of a price trend. MACD is considered one of the best technical analysis indicators but be aware that during choppy market conditions it may generate false signals.

 

MACD Explained

MACD is a momentum indicator used for following the short-term price trend and for identifying upcoming price reversals. MACD is a lagging indicator, therefore, it can inform us accurately about price divergences but it should be used with caution as a signaling machine

In general when the MACD EMA Lines are positive (above zero) then there is a bullish activity on the market. On the contrary, when the MACD EMA Lines are negative (below zero) then there is a bearish activity on the market

-MACD is a very useful tool in order to identify potential price reversals

-The MACD divergences can pinpoint reversals better than any other technical analysis tool

-It is better to apply MACD using the standard settings (12,26,9) in M30, H1, and H4 charts

 

 

-MACD divergences should be better combined with another indicator in order to signal trades, such as Bollinger Bands or RSI. MACD should not be used as an independent signal-generation machine

MACD is a lagging indicator therefore it can inform us accurately about price divergences but it should be used with caution as a signaling machine

 

Calculating MACD

MACD incorporates 3 components:

(1) MACD line whcih measures the difference between two Exponential Moving Averages.

■ MACD Line = 12 day EMA - 26 day EMA

The MACD line is used as a measure of the convergence and the divergence between the fast and slow EMAs.

(2) MACD Signal line which works as a Buy/Sell Trigger

■ MACD Signal Line = 9-period EMA of MACD Line

The signal line works as an indicator of the directional change of the main MACD line.

(3) MACD Histogram

■ Histogram = MACD Line – MACD Signal Line

The MACD histogram measures the difference between the MACD line and the Signal Line. If the two lines become the same then the MACD Histogram is found at zero level.

(i) When the MACD line is found above the signal line then the Histogram is positive

(ii) When the MACD line is below the signal line then the MACD histogram is negative

 

Technical Behavior

The MACD can signal a leading price movement before the actual market turns bullish or bearish, but be aware that very often these signals are fake.

Many traders combine the MACD with another indicator to make signal generation more accurate and create a powerful trading system.

 

General MACD Trading Signals

□ When the MACD turns higher and crosses the signal line then it is a general signal of an upcoming bullish market

□ When the MACD turns down and crosses the signal line then it is a general signal of an upcoming bearish market

□ The MACD Histogram can be used alternatively for trend identification. When the MACD Histogram is negative and then it reaches zero that means that the MACD line is crossing over the Signal Line and it is suggesting an accelerating bullish trend. On the contrary, when the MACD Histogram is positive and then it reaches zero that means that the Signal Line is crossing over the MACD line and it is suggesting an accelerating bearish trend.

 

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Important Notes

- MACD evaluates the Price Action while the Histogram shows what MACD is doing. The MACD histogram can pinpoint earlier signals than the MACD lines

- It is better to use MACD using the standard settings (12,26,9) but very short-term traders can use alternative settings (5-periods / 9-periods spread with a 3-periods MA)

- Don’t trade using MACD alone. MACD may be combined with RSI and other indicators. Use MACD on 1-hour chart and RSI on M15 chart

- Alternatively, MACD can be combined with Stochastic, %R Williams or Bollinger Bands

- MACD Divergences are occurring best on 1-Hour and 4-Hour Charts (use shorter charts to enter and to exit trades)

- Use MACD for identifying divergences and confirming the trend, not as an independent Signaling System

 

 

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