One toolbox that also uses moving averages in its calculations is the MACD, then how to use the MACD indicator?
MACD is an acronym of Moving Average Convergence Divergence, which found is Gerald Appeal, you can get the book at Amazon
Previously we already learning several toolboxes for conducting market analysis,
Now it’s time to learn again about the indicator which is also one of the default indicators in the MetaTrader 4 trading platform, MACD.
This indicator in the calculation also uses a moving average, with the type of exponential moving average.
MACD is one of the most popular technical indicators and many traders use it.
MACD is classified as multifunctional, so it can be relied upon as a tool in several types of trading strategies.
How to use the MACD indicator to measure the strength of the current trend.
As signal positions when to buy or sell, Measure market momentum, and Analyze overbought or oversold.area.
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What is MACD?
MACD is a momentum indicator that shows the relationship between two moving average prices, so this indicator follows the market price trend.
How to calculate MACD is by subtracting EMA 26 with EMA 12, the calculation results show the MACD line.
The nine-day EMA from the MACD as a signal line plotted above the MACD line serves as a trigger for buy and sell signals.
Traders can buy when the MACD crosses above the signal line and sell when the MACD crosses below the signal line.
The most common way to use Moving Average Convergence Divergence (MACD) indicators is a crossover and divergence.
This tool is used to identify moving averages that indicate new trends, whether they are bullish or bearish.
The MACD indicator includes a momentum oscillator that can generally give a good signal when the market is trending where prices tend in a certain direction.
For buying and selling signals using MACD lines and signal lines.
These two lines move around the zero lines on the right side of the graph.
The zero lines can act as support and resistance.
Oscillators such as MACD are generally most valuable when their values reach extremes.
When the MACD line is far below the zero lines at a very negative level, allow this oversold area as a buy signal.
When the MACD is well above the zero lines in very positive territory, this is an overbought area as a sell signal.
Using MACD indicator
Read also How to use moving average crossovers
Maybe you have found a MACD with a different display with the default MetaTrader 4 indicator.
Don’t be shocks because there are two MACD displays that are often found.
A version as the popular MetaTrader standard platform.
Consisting of MACD in the form of histograms and signal graphics,
And version B is the traditional version or classic version.
Consisting of the MACD graph, the signal line and Oscillator Moving Average (OSMA) in the form of a histogram, the MACD value of the subtracting signal.
Both are not different and provide the same information.
Now you don’t need to be confused with the difference in the display of MACD, however, when attaching MACD we will see a few settings.
- The first is the number of periods for the faster-moving average.
- The second is the number of periods for the slower-moving average.
- And the third is the number of bars used to calculate moving averages from the difference between faster and slower moving averages.
Normally the default MACD display is “12, 26, 9” as the MACD parameter.
- 12 represents the previous 12 candlesticks of a faster-moving average.
- 26 represents 26 previous candlesticks of slower moving averages.
- 9 represents the previous 9 candlesticks of the difference between the two moving averages (called histogram)
This defines MACD as the difference between exponential moving averages of period 12 and EMA 26.
From that calculation, it becomes the MACD main line.
In the traditional MACD display B version, besides the MACD graph, there is a signal line which is the moving average of the MACD graph with a period of 9.
MACD calculation is below
Main line MACD = EMA ( close, 12 ) - EMA ( close, 26 ) Signal line = SMA ( MACD, 9 ) Histogram = Main line MACD - signal line
Convergence vs Divergence
If you look at the traditional MACD graph when the two moving averages move away, the histogram becomes larger.
This is called divergence because the faster moving average is “diverging” or moving away from the slower moving average.
But as the moving average gets closer to each other, the histogram will be smaller.
This condition is convergence because the faster MA is “converging” or getting closer to the slower MA.
Therefore this indicator is called Moving Average Convergence Divergence.
Trade using traditional MACD
As with the moving average character, when there are two moving averages with different “speeds”, the faster one will obviously react faster to the price movement than the slower one.
When a new trend occurs, faster EMA will cross the slower EMA.
MACD as signal entry
When this “crossover” moving average occurs, and the fast line starts to “diverge” or move away from the slower line, it often indicates that a new trend has formed.
From the example chart above, you can see that the faster EMA line crosses below the MA slower line and signals a new downtrend.
Look closely that when the line crosses, the histogram temporarily disappears.
This is because the difference between the lines at that time is 0.
But when the downtrend starts and the fast line deviates from the slow line, the histogram becomes larger, which is a good indication of a strong trend.
Further, let try to look at the example below
From the example of the EUR/USD 1 hour chart above, the faster MA line crosses above the MA slower line while the histogram disappears.
This shows that the downtrend has ended and turned into an uptrend.
And then the price movement, EUR/USD starts to surge because of starting a new uptrend.
Imagine if you open buy after crossover, you will get almost 200 pips or more.
But there really is a shortage of MACD because basically moving averages are lagging indicators, this might give signal delay.
However, this is only a historical average price.
And indeed the MACD indicator is a lagging indicator, but there are still many who like to use it.
MACD as trend detection
How to use MACD as the trend detection is
- When the uptrend, the MACD area is in the positive zone or above level 0.
- Conversely, when downtrend, the MACD area is in the negative zone or below level 0.
MACD to measure momentum
Momentum with MACD can be known from the formation of the bars in the histogram.
- When a new trend is formed in the market, the histogram appears short but gets bigger.
- The peak of the trend occurs when the market power is fully charged and marked by the MACD histogram bar that appears the longest.
- The sign of market momentum starts to weaken when the bars are getting shorter on the histogram.
- When the market will turn around, the histogram gets shorter and looks smaller.
MACD Overbought Oversold Conditions
MACD can also be used to analyze overbought and oversold area conditions.
Overbought conditions based on MACD are when the histogram is above the zero levels (positive) and the length starts to decrease when it reaches the higher high level.
Conversely, an oversold condition based on MACD occurs when the histogram line is below the zero levels (negative) and the length starts to decrease when it reaches the lower low level.
MACD can help identify this situation when you want to enter based on signals from candlestick patterns and trend indicators.
MACD is a very popular indicator and many traders use this indicator.
Apart from the trading methods described in this article, some traders use divergence strategies using MACD.
Traders will identify trends by looking at the slope of the histogram and the slope of the candlestick pattern.
When traders draw the line and the slope of the price tends to go up, while when drawing the lines and the slope of the histogram tends to go down this is the divergence condition which is a sell signal.
Conversely for buy signals when the slope of the price pattern tends to go down and the slope of the MACD histogram tends to go up.
But even this indicator has weaknesses, the main thing is that this includes lagging indicators so you might get a late signal.
Some traders combine MACD with other indicators to get the same signal in determining entry.
To be able to understand the character of the indicator and its function you should use a demo account to learn to trade, so you will get real experience using MACD.