On this occasion, we will discuss the MACD trading strategy.
This strategy uses the MACD indicator, which stands for Moving Average Convergence Divergence.
The first time this indicator was developed by Gerald Appel in 1960, this indicator is one that is quite simple to use.
This indicator has been very popular among technical traders, and reportedly some professional traders use this indicator.
So don’t miss the discussion of strategies using this MACD, it might help you achieve consistent profits.
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MACD Strategy Indicator Explained
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MACD (Moving Average Convergence Divergence) is a very simple and useful indicator for a trader.
This is an indicator of technical analysis and also an indicator to detect overbought and oversold by looking at the relationship between long and short term Moving Averages.
The difference between the MACD and the signal line is often calculated and expressed not in the form of lines but in the form of a histogram bar graph.
This construction was made by Thomas Aspray in 1986.
MACD is an indicator has three parts, consisting of two lines, and one histogram.
Three elements In the MACD analysis
- Signal Line. Usually red. Calculated from EMA (Exponential Moving Average) in a span of 9 days.
- MACD Line. How to calculate lines from EMA reduction for 26 days and 12 days (EMA12 – EMA26).
- MACD histogram. How to calculate the MACD histogram bar graph is from the reduction of the MACD line value by the signal line (MACD line – Signal Line).
Gerald Appel suggested using a standard period in the 1960s is to use a period of 12 and 26 days.
The top graph shows the price of the instrument trading, the bottom graph is the signal line in red and the silver one in the form of a histogram which is the difference in value between the two.
The function of the MACD indicator is to
- Identify the price trend of trading instruments.
- Knowing the trend reversal, and detecting momentum.
- Identify overbought and oversold.
MACD Line and Signal Line
MACD is an indicator that is Trend Following. Designed to identify trend changes, and generally not recommended for use in volatile market conditions.
The MACD indicator is used to show the current trend. MACD line can be used to determine market trends.
In addition, MACD can also be used to find out a signal to sell and buy. The following two forms of trading signals from MACD are:
MACD against Zero value
If the MACD value is positive (above zero), it means the market is bullish. Meanwhile, if the MACD value is negative (below zero), it means the market is bearish.
Because the default MACD MT4 does not have a signal line, you can add a Moving Average indicator with periods 12 and 26, as a sign of a reversal.
By combining the two MACD functions above, when to buy or sell is as follows:
- Signal buy if the MACD is positive and the MA12 crossing MA26 from the bottom up (Golden Cross).
- Open to sell if the MACD is negative and the MA12 crossing MA26 line from top to bottom (Dead Cross).
By developing these two functions, investors can reduce risk and truly confident in trends.
In addition to using the MACD line, MACD histogram data can also be used to determine the transaction steps.
MACD histogram data obtained from the MACD line value minus the signal line.
The results of the histogram graph are bar graphs that fluctuate above and below the zero lines.
The MACD histogram graph shows when a crossing occurred, when the MACD line crossed through the zero on the histogram, it can be said that the MACD has crossed the signal line.
In some cases, histogram data can give signals faster than using MACD line and Signal line graphs.
The benchmark is whether the histogram chart has formed a peak or not, in the sense of whether the market is overbought or oversold.
After the longest bar occurs one or two declines, it’s time to buy or sell.
MACD Strategy Convergence Divergence Indicators
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In practice, the MACD indicator is also used to determine the convergence and divergence of a certain instrument trading.
An explanation of convergence and divergence is already in the previous article here.
The convergence of the MACD Indicator
As the term implies, Convergence is a state when prices and MACD charts appear to move together, where prices move down while MACD lines or histograms move up. An example of convergence can be seen as follows:
From the picture above shows the state of convergence, namely the price movement is down but the MACD histogram line actually goes up.
Avoid trading with Sell positions when this kind of Convergence occurs.
Better close all the Sell positions that you have, because this could be a sign of the end of the Downtrend.
MACD Divergence Indicator
Divergence is a condition where the price moves up, but the MACD line or histogram downward.
This kind of divergence is an important signal that often occurs. Examples of divergence you can observe as follows:
The picture above shows the state of Divergence, which is an upward movement in prices, but the MACD histogram line actually goes down.
You are not recommended for Entry Buy when the Divergence occurs.
Be careful if you still have an open Buy position, because this could be a sign of the end of the Uptrend.
How To Analyze MACD Divergence For Open Positions
Divergence signals from the MACD indicator can be used as a trigger to determine the ideal open position.
There are two types of Divergence that can be used as a reference for Entry, Bullish Divergence (Convergence Indicator MACD) for Entry Buy positions, and Bearish Divergence for Entry Sell positions.
Entry Buy in Bullish Divergence on MACD
If the MACD indicator shows a Bullish Divergence, it is recommended that you enter a Buy position.
However, before making sure you already have a confirmatory signal.
It can be a chart pattern that supports Bullish sentiment, a rejection at the Support level or Price Action forming a supportive pattern (Pin Bar, Inside Bar, Bullish Engulfing, etc.).
Stop Loss and Take Profit can be determined using a Risk / Reward Ratio of 1: 1.5 to 1: 2.
Entry Sell in Bearish Divergence on MACD
In a Bearish Divergence condition, you are allowed to do an Entry Sell.
This is marked by prices that continue to rise, while the high point of the MACD is decreasing.
Confirmation of Sell Entry can be obtained through Price Action, rejection of Resistance levels, or chart patterns that support Bearish sentiment.
Meanwhile, Stop Loss and Take Profit can be determined using a Risk / Reward Ratio of 1: 1.5 to 1: 2.
RSI-MACD advanced trading system
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Using RSI and MACD is an advanced setup for a trade.
Some traders have combined these two indicators as powerful tools to determine buy or sell positions.
Traders can use MACD with default settings 12.26.9 and RSI 7 settings, by removing levels 70 and 30 and only using level 50.
RSI can be used to search for momentum trading while MACD histogram as an indicator signal.
If both indicators show an up line then this is a buy signal and vice versa.
- You have to wait for RSI 7 to move above 50
- If RSI 7 is above 50, then wait for the MACD histogram to pass the zero line from the bottom.
- Buy near the candle by a stop loss at the lowest point of the candle.
- Exit point until you get a reversal signal.
- You must wait for RSI 7 to move below 50
- If RSI 7 is below 50, wait for the MACD histogram to cross the zero line from the top.
- Sell near candles by a stop loss at candle height.
- Exit point until you get a reversal signal.
Trading MACD and stochastic. Double strategy
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A double trading strategy using stochastic and MACD is a combination of powerful indicators for trading analysis.
Stochastic has the ability to determine the value of market saturation.
where the number 20 and below means the market is in an oversold condition.
So that it has the potential to move to bullish and if the Stochastic is at 80 above indicates that the market is in an overbought condition that has the potential to undergo a correction.
MACD as interpreted above is the average of the movements which must be sought here, namely the differences in convergence and divergence to determine the decline and increase in prices.
By using this double stochastic MACD strategy you can look for entry points by using MACD to look for divergent and convergent patterns.
And use stochastic indicators to determine the lowest and highest prices based on an overbought and oversold area in convergence-divergence conditions.
MACD Algo trading
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At this time the development of Algo trading has been done by many experts and big traders.
Algorithm trading is trading that is done automatically by utilizing data and technical analysis.
In its development MACD became one of the indicators used as the basis for algorithmic trading.
Not only for forex but also has penetrated for crypto trading.
To make MACD Algo trading must have knowledge of programming languages that will translate code languages into machine languages so that this software will make transactions automatically when new signals have emerged from MACD.
Before you use MACD Algo trading for trading real accounts, backtest is mandatory to find out whether the software works well or still needs improvisation.
MACD is a good indicator and can be a powerful strategy if it is used with the right understanding, the signal given by MACD gives a signal that has good accuracy, and by combining using other indicators, RSI and Stochastic will provide stronger confidence to determine the entry point.
However, there is no one hundred percent accurate strategy, so you must maintain money management and risk management in each of your trading plans.
You can use stop loss to anticipate if the signal that you have gotten is a false signal.
Discipline is important in trading, stay away from emotions when trading and stay calm in all market conditions.
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