How to Use the MACD Indicator?How to Use the MACD Indicator?
🔶 What’s MACD?
That is an abbreviation for Moving Average Convergence Divergence.
This technical indicator is a tool for identifying moving averages that indicate a new trend, whether bullish or bearish.
After all, finding a trend is a key priority in trading because that’s where the greatest money is produced.
A MACD chart typically displays three figures that serve as its settings.
▪️ The first parameter is the number of periods utilized to construct the faster-moving average.
▪️ The second factor is the amount of periods used in the slower moving average.
▪️ The third parameter is the number of bars utilized to construct the moving average of the difference between the faster and slower moving averages.
For example, if you saw "12, 26, 9" as the MACD parameters (which is typically the default value for most charting software), you would read it as follows:
🔹 The number 12 signifies a 12-bar moving average.
🔹 The number 26 denotes the moving average of the preceding 26 bars.
🔹 The 9 is a moving average of the difference between the two moving averages mentioned above.
When it comes to the MACD lines, there is a widespread misperception.
There are two lines:
🔺"MACD Line"
🔻"Signal Line"
The two lines that have been drawn are NOT price moving averages.
The MACD Line is the difference (or separation) of two moving averages. Typically, these two moving averages are exponential moving averages (EMAs).
The MACD Line is the "faster" moving average when looking at the indicator.
The MACD Line in our previous example is the difference between the 12- and 26-period moving averages.
The MACD Line's moving average is the Signal Line.
When viewing the indication, the Signal Line is the "slower" moving average.
The slower moving average plots the previous MACD Line's average. Again, in our previous example, this would be a 9-period moving average.
By default, most charts employ a 9-period exponential moving average (EMA).
This indicates that we are plotting the average of the last 9 periods of the "faster" MACD Line as our "slower" moving average.
The Signal Line's aim is to mellow down the sensitivity of the MACD Line.
The difference between the MACD Line and the Signal Line is represented in the Histogram.
It depicts the distance between the two lines graphically.
It may occasionally offer you an early warning that a crossover is going to occur.
When we look at our original chart, we can see that the histogram grows as the two moving averages (MACD Line and Signal Line) separate.
The faster moving average (MACD Line) is "diverging" or moving away from the slower moving average (Signal Line), resulting in a MACD divergence.
The histogram shrinks as the moving averages move closer together. Because the faster moving average (MACD Line) is "converging" or approaching the slower moving average (Signal Line), this is referred to as convergence .
That is how you get the name Moving Average Convergence Divergence.
So now you are aware of what MACD performs. Let us now demonstrate what MACD can achieve for YOU.
🔸 MACD Trading Guide
Given that there are two moving averages with differing "speeds," it stands to reason that the faster one will respond to changes in price more quickly than the slower one.
The faster line (MACD Line), which reacts first to a new trend, finally crosses the slower line (Signal Line).
It frequently signifies the emergence of a new trend when this "crossover" takes place and the fast line begins to "diverge" or move away from the slower line.
The fast line passed UNDER the slow line in the previous chart, correctly identifying a new downtrend.
You'll see that the Histogram briefly vanished when the lines intersected.
This is due to the fact that there is no difference between the lines at the moment of the cross.
The histogram increases as the downtrend takes hold and the fast line begins to diverge from the slow line, which is a sign of a strong trend.
Let's look at an illustration.
The fast line passed over the slow line in the above 1-d chart of BTC/USD, and the histogram vanished. This implied that the brief downward trend might eventually turn around.
After that, the BTC/USD launched a new upswing and immediately shot up.
🔴 BUT The MACD has one disadvantage.
Moving averages naturally lag behind price. It's only an average of past prices, after all.
Keep in mind that the MACD indicator has three parts:
🔹The MACD Line which represents the difference between two moving averages.
🔹The Signal Line which is a moving average of the MACD Line.
🔹The Histogram which is a graphical representation of the distance between the MACD Line and Signal Line.
However, MACD is still one of the favorite tools of many traders and mine, of course )
If you liked the post and it was useful to you - click <>, let newcomers see! Leave your comments, I'll be so pleased!
Sincerely yours Kateryna
