MACD is one of the leading indicators every investor should be aware of. The main reason for its popularity is the plenty of signals it provides. Although it looks complicated, understanding MACD isn’t a big thing.
What Is MACD?
MACD is Moving Average Convergence Divergence. It depicts the degree of divergence between two Moving Averages. There are two EMAs: fast and slow, which are used for the indicator’s calculation. The long moving average is subtracted from the short one. The result is flattened with the help of a Simple Moving Average. In the end, traders see two curves – MACD and the signal line – and a histogram.
Which Settings Are the Best?
Like any other indicator, MACD has default settings – 12, 26, 9. Standard settings are the best option among a wide range of parameters. However, they can’t work well on any timeframe and for any trading strategy. That’s why other options are more effective on specific timeframes.
8, 17, 9 is another famous combination. 3, 10, 16 parameters are mostly used for intraday trading. 5, 35, 5 settings are more sensitive to price fluctuations; thus, they are usually applied on smaller timeframes.
The MACD indicator definitely deserves your attention – check out why:
- Free and standard. The MACD is a free standard indicator on various trading platforms, including MetaTrader. It means that the indicator can be simply found among basic technical tools.
- Any timeframe. MACD can be applied to any timeframe. However, as it’s a lagging indicator, it provides more reliable signals on higher timeframes.
- Any asset. The MACD indicator provides signals for currencies, cryptocurrencies, and CFDs.
- Many signals. There are two leading groups of technical indicators: trend and momentum. The MACD combines the functions of both of them. Thus, it provides plenty of signals.
- Simplicity. The indicator is straightforward if you know what signals it can provide.
Let’s take a closer look at the best indicator’s implementation. The major feature of MACD is that it depicts whether uptrend/downtrend strengthens/weakens. Knowing this, you can avoid unprofitable trades. Now is the main part of this tutorial – MACD signals.
Above, we told that the indicator consists of two lines – MACD and signal. You should buy when the MACD line crosses the signal line bottom-up. A sell signal occurs when the MACD crosses the signal line from top to bottom. The buy/sell signals are more reliable during a sharp trend. If the trend is weak, there are risks of fake signs.
Zero Line Crossover
The MACD indicator includes a histogram. If it moves up, settling above the 0 level, there are odds of the upcoming price upward movement. If the histogram is below the 0 line, there is a chance of the downward price direction.
Tip: the zero line crossover signal works well during a strong trend. High volatility can cause histogram fluctuations that lead to fake signals.
Convergence/divergence reflects a difference between price and indicator directions. A bullish convergence occurs when the price moves down, forming lower lows, while the MACD histogram creates higher lows. It’s time to buy.
A bearish divergence is a situation when the price sets new highs, but the MACD indicator goes down, and its extremums become lower. In this case, traders should sell.
MACD is an oscillator – thus, it defines market conditions. MACD and signal lines are the key point of this signal. If they form significant highs or lows, it’s a sign of an upcoming correction.
The RSI indicator has specific levels of overbought/oversold zones: 70 and 30. As for the MACD indicator, there are no exact levels. As soon as you see a significant rise or fall which exceeds the previous one, the MACD indicator is in the overbought or oversold area.
If the indicator sets new highs, it is a sign of the overbought condition. Wait for the reversal down. If the lines form extreme lows, wait for an upward reversal.
What to Keep In Mind
Although MACD is simple enough to get reliable signals, traders can make mistakes when reading it.
- The histogram reflects whether bulls or bears prevail in the market. Although some traders believe it’s a good time to enter the trade in the direction of the current trend, more likely, it’s just a sign of the upcoming correction. Thus, traders should avoid entering the market.
- MACD is a lagging indicator. The time lag of the MACD is one of the largest. Thus, it isn’t the best tool to catch an entry point.
- MACD isn’t effective when setting Stop Loss and Take Profit orders.
To conclude, the MACD indicator is a highly recommended tool you can apply to different trading strategies. Various signals are the main thing that should encourage you to use MACD while trading.