Moving Average Convergence Divergence

(MACD)

◙ Usage: Trend-Following Momentum Indicator

◙ Trading: Trading Signals from Crossovers | Slope Divergences

◙ Standard Settings: 12-period Fast, 26-periods Slow, and 9-period EMA

 

Introduction to MACD (Moving Average Convergence Divergence)

Developed by Gerald Appel in the 1970s, MACD is a trend-following momentum indicator and one of the most widely used technical analysis indicators worldwide. The oscillator can evaluate the momentum of the trend and generate reliable trading signals.

• The MACD is the difference between a 26-day and 12-day EMA (exponential moving average)
• The Signal Line is a 9-day EMA which works a trigger for buying/selling the market

The MACD can be used for trading any financial market (Foreign Exchange, Equities, Commodities) in multiple timeframes. There are two ways to visualize MACD:

(a) 2 classic lines system (MACD and Signal Line) and focus on where they are interacting

(b) MACD Histogram (and focus on crossovers above/below zero)

The MACD Histogram

Developed by Thomas Aspray, the MACD-Histogram shows the distance between the MACD line and the signal line. 

-MACD evaluates the Price Action while the Histogram shows what MACD is doing

-The MACD-Histogram can be used as a signaling machine at zero price (moving above/below zero (0) signifies a crossover)

-The higher the histogram value the stronger the price momentum

-MACD-Histogram divergences can alert for an upcoming signal line crossover in MACD

 

 Calculating the Moving Average Convergence Divergence

■ MACD Line = { Exponential Moving Average (12 periods) – Exponential Moving Average (26 periods) }

The MACD line is used as a measure of the convergence and the divergence of the fast and slow EMAs (Exponential moving averages)

■ Signal Line = { Exponential Moving Average (9 periods) of MACD Line }

The MACD signal line is used as an indicator of the directional change of the MACD line

■ MACD Histogram = MACD Line – Signal Line

The MACD histogram reflects the difference between the MACD line and the MACD signal line:

• The MACD histogram is positive when the MACD line is above the MACD signal line
• The MACD histogram is negative when the MACD line is below the MACD signal line

 

 

Trading with MACD

MACD is based on 3 moving averages and this means it can analyze price momentum.

The Moving Average Convergence Divergence can be used for different tasks:

• Identifying the Trend
• Evaluating the Momentum of the Trend
• Trading Signals from MACD Line Crossovers
• Trading Signals from Slope Divergences between the Price Chart and MACD
• Contrarian Trading

Timeframes

You can apply MACD in multiple timeframes, but not in very short timeframes. The suggested timeframes include:

• M15, M30, H1, H4, and D1

Note that MACD trade signals are more reliable in H1 and H4 timeframes

Evaluating the Momentum of the Trend

Here is how easily we can use MACD to evaluate the momentum of the trend:

-When the 2 MACD lines move away from each other → the momentum is increasing and the trend is getting stronger

-When the 2 MACD lines come closer to each other → the momentum is decreasing and the trend is getting weaker

Signals from MACD Signal line Crossovers

This is the easiest way to trade with MACD:

□ When the MACD turns higher (↑) and crosses the signal line → buy the market (↑)

□ When the MACD turns down (↓) and crosses below the signal line → sell the market (↓)

(+) If you use the MACD Histogram, the crossover above/below the signal line is the point zero (0)

Signals from MACD Divergences

Trading the Price/MACD slope divergences is the most sophisticated way to trade with MACD and can lead to 'early-entries'. A lot of professional traders focus on these divergences as they can prove a great tool for generating reliable trading signals

□ In a falling market (↓) a Positive Divergence occurs: 

When the MACD slope turns bullish (/) and price slope is still bearish (\) → buy the market (↑)

□ In a rising market (↑) a Negative Divergence occurs: 

When the MACD slope turns bearish (\) and price slope is still bullish (/) → sell the market (↓)

 

Key Tips When Using MACD

(1) Don't use MACD in timeframes below M15

(2) The MACD Histogram is easier for beginners

(3) As an oscillator, MACD will not provide reliable trading signals during very strong trends

(4) The trading signals emerging from MACD Divergences are more reliable than MACD Signal Line Crossovers

(5) MACD Divergences are more reliable in H1 and H4 Charts (use lower charts to enter and to exit trades)

(6) Nevertheless, MACD Divergences are not always generating reliable signals. Traders should better confirm MACD signals with price action breakouts:

• Support/Resistance Breakouts
• Price Channel Breakouts
• High Volume Breakouts (only for equity trading)
• Candlestick Breakout Formations (learn more here about candles)

You can also confirm MACD Divergences signals by using a lower RSI chart (for example H1 MACD and M15 RSI)

(7) In trending markets, the MACD lines will move away from each other, while in ranging markets, the two MACD lines will come close to each other

(8) There are alternative settings for MACD, for example (8 | 17.5 | 9)

 

Platform Setup

You can install the 'MACD' or'MACD HISTOGRAM' directly in MetaTrader-4 or MetaTrader-5:

(i) CLASSIC (2-LINE) MACD SYSTEM

□ GO TO → INDICATORS → OSCILLATORS → MACD

□ STANDARD SETTINGS → 12,26,9

(ii) MACD HISTOGRAM

□ GO TO → INDICATORS → CUSTOM → MACD HISTOGRAM

□ STANDARD SETTINGS → 12,26,9

 

■ The Moving Average Convergence Divergence

George Protonotarios, financial analyst

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