Using the Moving Average Convergence Divergence (MACD)MACD – What it is
The Moving Average Convergence Divergence (MACD) is the momentum indicator that shows the relationship between two different moving averages:
1. The 12 period exponential moving average – On Tradingview it is the Fast Length.
2. The 26 periods exponential moving average –On Tradingview it is the Slow Length.
The MACD line is calculated by subtracting the 26 period EMA from the 12 period EMA.
The Signal line is the 9 period exponential moving average.
These two lines are then plotted on top of each other. These are the two lines you see when you turn on the MACD indicator.
Additionally, there is a histogram that shows the distance between the two lines. Larger bars tell us that the MACD and Signal are further apart.
When it comes to candles, size matters. The larger the candle the more momentum the trend has.
The histogram will turn green when the MACD line is above 0 (bullish) and it will turn red when the MACD line is below 0 (bearish).
Very bearish momentum is shown above. Photo was taken May 23, 2021.
How to use the MACD
The most important thing to know about the MACD is how to read the relationship between the two lines.
I’ve found that the best timeframe to use the MACD with is daily. This is because the MACD is a lagging indicator and using daily data prevents a lot (not all) of false buy and sell signals.
These signals are:
• When the MACD line crosses above the signal line it is a buy signal
• When the MACD line crosses below the signal line it is a sell signal
Additionally, it is best to use the MACD in a trending market; a market with a clearly defined up or down trend.
Using the MACD with trend lines is a very powerful combination.
The reason for this is that if the market is moving sideways, you can see small fluctuations where the MACD and Signal Line cross but the price does not really go anywhere. These are false breakouts.
Therefore, these signals are not automatic buys and sells.
There are ways of confirming the indications from the MACD chart.
One way is a strategy that uses the RSI and MACD together (which is beyond the scope of this text, but I will discuss in my next article).
Another way is to use the MACD with the current trend. So, if you are in an uptrend and then you see a bullish cross, then this is confirmation that you are likely to go higher.
The same is true in reverse.
Also, please note that the cross over happens well after the price either stabilizes or rises. Again, this is because the MACD is a lagging indicator.
Leading Indicator?
Since the MACD and Signal lines are lagging indicators is there something that can be used in a predictive way?
Some traders use the histogram as a way to predict when a reversal will occur.
Since the MACD is a momentum indicator it can show us when sell pressure is alleviating. Meaning it might be a good time to buy.
This doesn’t always work of course, but with good risk management (stop losses) you can often get into a position well before its breakout.
Conversely, it can show you when your long position is running out of steam and can warn you when to get out.
MACD Divergence
Another useful way to use the MACD is to spot divergences.
A bullish divergence, very similar to the RSI, is when the short-term price trend is going down but, the MACD is going up.
Bearish divergence, also very similar to the RSI, is when the price trend is going up but, the MACD is going down.
Trading this way is sometimes not a good idea because you are trading against the trend. Please practice good risk management if you are trading reversals.
Also, notice the buy signal right before the sell signal that is circled. I really want to hammer home the point that the signals are not automatic buys and sells.
Price action is a great way to confirm the reversal (to the up or down side) of a trend. Because simply spotting a divergence does not guarantee the price will follow.
Final thoughts
As you can see there are different ways of successfully using the MACD. I hope I’ve made a few of these ways clear in this beginner guide.
Please let me know if you have any questions and if you like it, please hit the thumbs up and be sure to follow for more.
Links to my Fibonacci Retracement and RSI guides are below.
Thanks for reading!
