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Ultimate Guide to the MACD Indicator

20 Sep 2017,

In this article, we’ll introduce the main features of the MACD indicator, as well as its right setting that can help you to analyze the market and better follow the market movements. I will show you also how you how to implement this indicator in your daily trading.

Indicator MACD is a trend indicator that is based on moving averages and it is therefore an ideal dynamic tool for filtering trading opportunities.

MACD stands for Moving Average Convergence/Divergence and is relatively simple in its principles.

To understand its principles, let’s first look at how the indicator works.

MACD Indicator and a little bit of theory

The MACD line is the core of the indicator and it represents the difference between EMA with period 12 and EMA with period 26 (in the default setting). This means that the MACD line clearly shows the crossing of the moving averages in one line below the graph. If the MACD line is above zero, EMA 12 is above EMA 26 and vice versa.

The second part of the indicator is so-called signal line, which is nothing more than the exponential moving average calculated from the main MACD line, its default setting is 9.

Basic use of the MACD indicator

Because the indicator is based on moving averages, it is ideal for:

  • market analysis
  • market dynamics analysis
  • finding suitable entry levels
  • staying in the trade until the moving averages are again crossing each other
  • predicting bigger movement based on increasing momentum
  • filtering entry levels

Let’s see how to work with indicator MACD:

1# Crossing of moving averages

On the screenshot below, you can see moving averages directly in the market (EMA 26 and EMA 12), as well as the same setting of the MACD at the bottom of the screenshot with values 12, 26 and 9 for close candles.

Indicator MACD

Once the market exceeds the horizontal zero line in the MACD indicator, the moving averages are crossed and there is a trend change. It will help us to see the trend very quickly and we can use it as a filter for our trades.

 

2# Strong momentum: Lines are moving away from each other

When you see two lines moving away from each other in the MACD indicator with 12 and 26 settings, it means a rising market momentum, which means that there may be significant movement in that direction.

How to Use MACD Indicator, MACD indicator

 

Two lines of the MACD indicator moving away from each other indicate an increased momentum and a stronger trend.

The MACD indicator is great for determining  new trends and for following market dynamics, we can see bigger movements thanks to it and that help us to eliminate early entries.

How to use the indicator MACD in everyday practice

This depends on the trading strategy and the chosen timeframe. It is best to look for inputs on higher timeframes, such as 4h, 1d or even one week time frame. On lower timeframes a “market noise” may occur and the indicator will signal inputs too often with smaller probability to achieve profit.

But it is better to use it as a filter. Then we can use it for any timeframe. If we are trading the market in the trend direction, we are looking for entry signals only when the MACD is above zero. In case of chop strategies – when market is going sidewise, we usually use it in opposite way, if MACD is above zero, we are looking for sell signals and if it is below zero, we are looking for buy signals.

With automatic strategies, it is mostly used as a filter.

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