Greetings! Today we talk about The MACD.
The MACD trend oscillator, or Moving Average Convergence/Divergence indicator (MACD) is one of the most common classic tools of technical analysis.
Here’s a breakdown.
The indicator was developed by New York trader Gerald Appel in 1979 to analyse the stock market, and after that it was widely used in commodity and derivative markets as well.
The MACD indicator is essentially a trend oscillator, combining the properties of both a trend indicator and an oscillator
The purpose of the indicator is to provide a visual signal to open or close a position, as well as to reduce the lag and eliminate a number of disadvantages inherent in conventional trend indicators
The indicator consists of a MACD line with a signal line, as well as a histogram. Let’s analyse each element separately
Three exponential moving averages (EMA) with different periods are used for calculation. A slow moving average with a longer period (EMAl) is subtracted from a fast moving average with a smaller period (EMAs). The MACD line is plotted using the obtained values.
MACD = EMAs(P) — EMAl(P)
The default periods are 12 and 26, I do not recommend changing them, as all market participants work on these values
The author himself suggested the following periods of moving averages:
For selling: 12 — fast, 26 — slow, 9 — signalling
For purchases: 8 — fast, 17 — slow, 9 — signal line
However, I repeat, the overwhelming majority of market participants work on the 12–26–9 combination, so it is optimal to take this value
The obtained line is smoothed by the third exponential moving average (EMAa) with period 9, which results in the MACD (Signal) signal line.
MACD (Signal) = EMAa(EMAs(P) — EMAl(P)).
These two curves represent the regular linear MACD
The principle of the MACD Histogram is as follows: the histogram bars show the difference between the Signal and MACD lines. This greatly simplifies the perception of the strength of the trend movement, and allows you to build trading ideas with the help of certain dependencies
Let’s look at a few features to better understand the indicator
1. When the fast moving average is higher than the slow moving average, the MACD line is above zero, and when the opposite is true, it is below zero. Accordingly, the position of MACD relative to the zero mark and the direction of its movement indicates the prevalence of “bullish” or “bearish” trend
2. This indicator is most effective when there is a trend. In a sidewall can give false and delayed signals, so it is recommended to use it in conjunction with other tools and indicators of technical analysis
1. Intersection of MACD lines and signal line
It is the main signal given by the indicator. When the MACD line crosses the signal line from bottom to top, it is a buy signal. Crossing from top to bottom — on the contrary, it is a signal to sell.
On the histogram this signal will correspond to the crossing of the histogram bars through zero.
It is especially good to use this signal when opening deals in the direction of the trend on the senior timeframe.
Exit from the deal is carried out by the opposite signal, or using other tools of techanalysis
You can see an example of working out on the chart below. Pay attention to the presence of false signals, without it in trading you can’t go anywhere.
That is why I recommend using it in conjunction with other tools
2. Using it as an oscillator
To do this we need to look at the MACD histogram, the bars of which can be used to assess whether the traded asset is overbought or oversold.
When the bars are above zero and after the growth the first declining bar appears — this can be used as an auxiliary signal indicating the growth of selling pressure.
The opposite situation would indicate growing buying pressure
I would not recommend to consider this signal as a stand-alone signal, at least on TFs below 1d, but it can be very useful as an addition to others
3. Divergence
The most popular, and useful (in my subjective opinion) MACD signal. When the price draws a new extremum, and the MACD line shows the opposite dynamics, it indicates a fading trend and a high probability of movement in the opposite direction
Similarly, divergence can also be looked for on the bars of the histogram
There are many different trading strategies and bundles with MACD indicator.
Usually MACD divergence is used as a pre-emptive signal, and the specific entry point is selected by crossing the lines and other indicators.
It can also be combined with RSI and Stoch overbought/oversold zones, as in the example below.
1 — we see a pink bar — a signal for a trend change
2 — we see oversold zone on RSI
3 — we see crossing of signal lines
Based on the combination of factors, it is possible to open a long position
The best option is to experiment. On different assets, markets, and even timeframes, some indicator combinations can behave worse and some better. Try to combine MACD with other instruments and watch the result
Personally, I use this indicator in my trading, and I consider it one of the basic indicators for a trader working in any market.
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Disclaimer: This article is for educational purposes only and should not be considered financial advice. Always conduct your own research before making any trading decisions.
This article does not contain any affiliate links. The page referenced is simply my personal page where you can enter your email if you are genuinely interested in learning more about trading.
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