MACD: A Primer

The best time frame to use with the MACD depends on the type of trade, instrument, and stock that you’re interested in creating and executing a strategy for. In addition to bearish and bullish divergences, the MACD might confirm price movement as well. Nevertheless, the MACD technical indicator made a clear lower low from Low #1 to Low #2.

  1. It provides valuable insights into the market conditions and helps traders make informed decisions.
  2. This information has been prepared by IG, a trading name of IG US LLC.
  3. The breakout of the MACD lines and the price action led to the next trending phase.
  4. Once you understand the parameters used to calculate MACD, you can adjust them to fit your trading strategy.
  5. However, other tools were designed to give such signals and do a better job.

Traders may draw trendlines on the MACD chart to demonstrate peaks and troughs in MACD momentum. Controls indication of MACD crossovers above and the signal line. You’ll get how to interpret macd access to a few videos and then you’ll be contacted by someone on my team. It’s not for everyone, but if you’ve read this far you’ve already shown your determination.

The MACD Line is the difference (or distance) between two moving averages. These two moving averages are usually exponential moving averages (EMAs). The zero-cross strategy could be used again to take a long position when the MACD crosses the zero line from below. At the point circled in our image, prices have been rising and momentum is up. We’ll use our zero-cross image as an example of trading the zero-cross. As trading proceeds, you observe the MACD initially crossed the zero line from below, then crossed again from above.

On the other hand, decreasing the length can generate more frequent but potentially less accurate signals. If the MACD shows that momentum is decreasing while prices are still above $45 per share, this could suggest that it’s time to exit the trade before losses become too great. While the MACD is a popular momentum indicator, it is not enough by itself to accurately forecast price trends. Experienced traders a variety of metrics in order to support their predictions.

Therefore, understanding market trends and conditions is crucial in determining whether to take a trade based on MACD signals or not. Combining multiple timeframes can provide a clearer picture of market trends and help filter out false signals generated by short-term fluctuations. A bearish divergence occurs when there is a discrepancy between price action and the MACD indicator.

While 12, 26, and 9 are the typical value settings used with the MACD, traders can opt for other values depending on their trading style and goals. This time we have the H1 chart of the USD/CHF a.k.a. the Swissy. Bullish MACD Signals – Consider opening long trades after each of these three signals.

Understanding the Calculation of MACD

If you do not agree with any term of provision of our Terms and Conditions, you should not use our Site, Services, Content or Information. Please be advised that your continued use of the Site, Services, Content, or Information provided shall indicate your consent and agreement to our Terms and Conditions. Look at the picture above; you can see that when the 12EMA and the 26EMA cross, the Value Line crosses the zero line. The picture above shows that when the Value Line converges with the Avg line, the Diff Swabs become shorter. When the Value Line and the Avg Line cross over, the Diff Swabs cross over from one side of the Zero Line to the other. That may sound confusing when learning how to read MACD; however, it means that instead of presenting Diff as a line (like the Value Line or the Avg Line), the Diff is shown by using Swab Bars.

When the market price is moving strongly in a direction, the histogram will increase in height, and when the histogram shrinks, it is a sign the market is moving slower. Whereas RSI is bounded between 0 and 100, the MACD is unbounded, making it more useful in trending markets than for identifying overbought and oversold conditions. Because the indicator measures momentum, analysts believe the price action will follow the momentum.

Test Your Trading Thesis With Paper Trading

The other arrows and text point to the MACD line, the MACD signal line, and the difference line histogram. Traders use this indicator to help determine buy or sell signals and to confirm or deny their trade thesis. One of the big lessons I teach Trading Challenge students is you have to figure out the trading strategies that suit you. Some of my students use MACD and other advanced technical indicators.

Using the MACD with other indicators

When the histogram is positive (i.e., above the baseline) that means that the MACD is higher than its nine-day average, signifying a recent increase in upward momentum. When the histogram is below the baseline, the MACD is lower than its nine-day average. One technique that technical analysts may use to confirm the direction of the trend is to determine whether the MACD indicator is making higher highs or lower lows in conjunction with the price. Some traders that utilize this strategy wait for a „trigger,” or some sort of confirmation of the divergence. Both the S&P 500 and MACD have been making lower lows in recent weeks, which suggests that the downtrend may continue.

Develop your trading skills

In sum, the various signals generated by MACD appear to have been bearish over the past several weeks, suggesting the short-term trend may continue to be down. Of course, fundamental factors could quickly change this outlook. Keep an eye on the latest market developments, both in the charts and in other data, to stay ahead of the trend.

If the price action creates a lower low on a long trade, or higher high on a short trade, your position will be closed automatically. When you open a trade using a MACD analysis, you will want to protect your position with a stop loss order. To place your stop loss order effectively, you should refer to the chart for previous price action swing points.

Check out this MACD Indicator Bounce bot workshop to learn more about automating a simple MACD strategy. You can even use MACD in your automated trading strategies with this decision recipe. I became a self-made millionaire by the age of 21, trading thousands of Penny Stocks – yep you read that right, Penny Stocks. The weapon of choice is knowledge and an excellent way to improve your knowledge is with the Trading Challenge.

Or, pairing the MACD with the Money Flow Index (MFI) confirms price momentum with an increase in volume. When you trade the type of stocks I do, it’s not uncommon to see a stock rip 100% or more in a single day. They might say something like, “This is the next Microsoft.” It’s not.

However, there are many other ways to manage your trade based on your personal preferences. In the green rectangle on the image above you see a case where the fast MACD line gains a relatively big distance from the red signal line. The “9” comes from the calculation of the slower line a.k.a. the signal line. This line is a product of a 9-period Exponential Moving Average plotted on the faster MACD line. This is why the signal line is slower than the MACD line – because it is the smoother version of the MACD line. On most trading platforms, the MACD indicator typically comes with the default parameters 26, 12, and 9.

This suggests confirmation should be sought by trend-following indicators, such as the Directional Movement Index (DMI) system and its key component, the Average Directional Index (ADX). After the divergence, the price reversed strongly to the downside and the MACD fell below the 0-line for the first time. This started the new down-trending period with the MACD staying below 0 all the way. At point #1, the price traded in a narrow range while the MACD lines hovered closely around the 0-line and constantly crossed each other.