This type of strategy is very popular to new traders. It is above the zero level too. Although based on short-term trading, keeping the long-term picture in mind will help investors trade with the trend.
How to Trade Using MACD
So they limit their profit because they have no patience to hold their positions longer. Also in many cases that you want to follow a trend, MACD tells you that it is too late and the trend is exhausted and may reverse at any time. In this article, I am doing my best to cover all of these cases and help you use MACD in your trades in the best possible way.
This indicator is developed by Gerald Appel who was a trader and market technical analyst. MACD is the difference of a 12 and a 26 exponential moving average. Typical MACD indicators, have one extra line, which is an exponential moving average of the main line.
This moving average is set to 9 by default and it is called signal line. Instead, it has MACD bars histogram. As you see, MACD is nothing but the combination of two moving averages.
In spite of this, it is a very strong and reliable indicator because it eliminates the market noise. If you are a trader, probably MACD formula will have no use for you. You will need it, if you are a programmer and want to use MACD in designing and developing an EA expert advisor or robot, or your custom indicator. However, the formula helps you understand the indicator better. Main Line — Signal Line.
If you like to have the same colored MACD we have on our charts below screenshots , please download and install it to your platform before we start explaining about MACD and the way we use it in technical analysis and forex trading. This indicator works on MetaTrader 4 or MT4. The below chart shows how colored MACD looks like. In the indicator you downloaded above, it is set to zero by default, but you can change it back to 9 if you like.
The MACD bars histogram you see on the below chart, reflect the difference of the main and signal lines. On the price chart, you see the main and signal lines. The red one is the main line and the green line is the signal line. As you see, wherever the distance of these two moving lines is bigger, the MACD bars will become longer too, and wherever these two lines cross, the length of the related MACD bar is zero follow the black arrows.
As you see, when there is an upward movement and pressure the market is bullish , MACD histograms go up and change to blue and when there is a downward pressure and movement the market is bearish , they go down and change the color to red.
MACD bars form highs and lows. When we have an uptrend, they form higher lows and when we have a downtrend, they form lower highs and when the bars go under the zero level, they form lower lows:. Of course, if you know about the Elliott Waves and also the cycles, you will not take any positions against the trend, even if MACD is not on the chart, but as knowing the cycles and Elliott Waves is very difficult, you can use MACD to stay away from going against the trend.
Please look at the below reversal signal. A candlestick is formed completely out of the Bollinger Bands and then three Bearish candlesticks form that are all reversal signals. But, the second sell signal the yellow zone , looks like a good short trade setup. So going against MACD is risky.
Of course, the above signal formed by the candlesticks are not strong enough. That is why the price did not reverse and kept on going up. As novice traders are unable to distinguish the strong candlestick trade setups, having MACD can be a big help not to go against the trend based on the weak trade setups. MACD also indicates whether the market is overbought or oversold. When it is overbought, it is riskier to go long and when it is oversold, it is riskier to go short.
When the market is overbought, Bulls buyers can start collecting their profit they sell at any time, and so the price may go down, and when the market is oversold, Bears can start buying at any time, and so the price may go up. Of course, the candlesticks also tell you if the market is overbought or oversold, but MACD is also a big help. You are a trend trader. You have an uptrend here below. You see some reversal signals, but you wait for a continuation signal to go long.
A strong Bullish candlestick forms the last one on the below chart and at the same time the last MACD bar changes its color and shows an upward pressure. Of course it can go much higher, but we never know:. This position goes up only for one more candlestick and then goes down and triggers your stop loss:. MACD trading is so common among the Forex traders. They just wait for a fresh MACD movement for a few bars and then they enter. MACD is really good for trend trading. MACD has to be used as a confirmation only.
The main indicator is the price. If you use MACD as a confirmation for support and resistance breakout, it will be a big help.
Look at the below image. There is a trend line with valid and visible support line. You are waiting for the support breakout to go short. It is above the zero level too. So you go short at the open of the next candlestick, set your stop loss above the high price of the last candlestick and your target will be the next support level. It goes down and hits the target very easily. Obviously, it is a new chance to take another short position, but look at the MACD and its difference with the previous position.
With the previous position, MACD started going down while it was way above the zero level. It means, you would go short while market has been overbought which is a good decision. In this position below , not only MACD is not above the zero level, but it has already started going up and making higher lows. So the market is oversold and your sell signal is not fresh. If you use the traditional MACD, then the same divergence can form with the main and signal line.
The rule says, the price will finally follow the MACD direction and will go down. However, the problem is you never know when the price will start following the MACD direction. So, if you rush and take a short position right when you see the MACD Divergence, it may keep on going up for several more candlesticks. MACD Divergence can be seen at the end of uptrends. What does it mean? The market can collapse at any time.
Fear is stronger than greed and when markets go down, fear is the dominant emotion. MACD Convergence forms when price goes down and forms lower highs or lower lows, but at the same time MACD bars go up and form higher highs or higher lows. The rule says, the price will finally change the direction and will follow MACD. MACD Convergence can be seen at the end of downtrends. It means if you are a trend trader, you should not go short when you see that MACD Convergence is formed. I have been in the markets for over 12 years, but still your detailed approach helps a lot in fine tuning my strategy from my experience macd is one of the best indicators.
I came to an idea to study macd after a trader i knew from a big bank few years ago was making millions dollars a year using Elliott waves with macd. Thanks Dr Chris the concept is broadly explained. I have a question how possible is it to use the crossing of the main and signal line in determining the trend movement. Does it have any effect? I notice the predominant upward presense of the Red line which is the main line in an upward trend?
MACD is a slow and lagging indicator and so it is good for following the trends. Additionally the crossing of the main and signal line usually reflects the trend exhaustion and reversal. Open Your chart and click on add indicator.. As author, you may use with HikenAshi chart. Although MACD is lagging..
Can we set main line and signal line manually?? Please Chris tell me values.. Here we are using the MACD histogram only. For the purpose you explained, you need to have the MACD both with the lines and histogram like what we have here: Please explain what is ment by it?
In the above article, just under the first image, it is written: A bit unclear here. The signal line is simply a moving average built on the value of the MACD line. By default, this value is commonly set at 9 periods. As you can see from the above graphic, some of these MACD signals would have worked out beautifully, while others leave something to be desired. This highlights the reason that traders will often want to look at other indicators or mechanisms of deciding which signals to take or which to ignore.
But, an alternative for traders is to simply use different inputs. The default MACD inputs of 12, 26, and 9 are the more common settings for the indicator. The fast MA is listed first, followed by the slow MA, followed by the input of the signal line. Traders looking to take signals solely from MACD, without any additional indicators to assist in grading trends or momentum are often better served by slowing down the indicator by using longer-period moving averages in the inputs. A common set of inputs to accomplish this goal is the inputs of 21, 55 periods.
The chart below will show the difference between the default of 12, 26, and 9 above with the inputs of 21, 55, and 9 below. Notice that the MACD indicator below gives fewer signals, with the goal of each signal being more reliable.
What you Need to Know about Overbought and Oversold. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Take a free trading course with IG Academy. Our interactive online courses help you develop the skills of trading from the ground up. Develop your trading knowledge with our expert-led webinars and in-person seminars on a huge range of topics. A demo account is intended to familiarize you with the tools and features of our trading platforms and to facilitate the testing of trading strategies in a risk-free environment.
Results achieved on the demo account are hypothetical and no representation is made that any account will or is likely to achieve actual profits or losses similar to those achieved in the demo account. Conditions in the demo account cannot always reasonably reflect all of the market conditions that may affect pricing and execution in a live trading environment. Price action and Macro. Please enter valid email. Please fill out this field. Please Select Please select a country.
Yes No Please fill out this field.