Table of contents
What is the MACD indicator?
The Moving Average Convergence Divergence (MACD) indicator is one of the popular choices among traders due to its ability to indicate market movement. It is a trend-following, lagging indicator that helps to identify the potential buy or sell signals. The MACD consists of four components which are well-known as the MACD line, the Signal line, Histogram and Zero line. MACD line is typically called a fast line as it compares 12 and 26-period moving averages to calculate its value while the Signal line also called as slow line as it compares the 9-period moving average to measure its value. The histogram, visually represents the direction of trend, strength in trend, momentum changes and potential reversals whereas the zero line is the horizontal line acts as base line for the histogram. The crossovers and combinations of all these constituents of MACD indicator generate various signals and valuable insights that traders have to understand to gauge the probable move of market.
How to Setup MACD indicator?
Here are some steps to set the MACD indicator ( we are going to use it in tradingview )
1. In the trading view's indicator section search for the MACD indicator, you will get it as Moving Average Convergence and Divergence, apply it simply clicking on it.
2. Once the indicator is applied, go for its setting, inputs option, you will find some settings with the fast length, slow length and signal smoothing, by default it will be 12, 26 and 9 respectively, if not, correct them. Under the style section, there will be the MACD, signal and zero line with their default colors on the chart.
3. Confirm that oscillator MA type and signal line MA type selected with the option " EMA" and not "SMA" because EMA refers to exponential moving average which is quickly responsive to new information and sudden price changes compared to SMA called simple moving average.
4. According to the type of trade that you are going to place, it could be intraday, swing or positional trade, chose the timeframe of indicator, by default, it will be according to the timeframe of the chart.
5. You can further customize the settings according to your trading strategy.
1. In the trading view's indicator section search for the MACD indicator, you will get it as Moving Average Convergence and Divergence, apply it simply clicking on it.
2. Once the indicator is applied, go for its setting, inputs option, you will find some settings with the fast length, slow length and signal smoothing, by default it will be 12, 26 and 9 respectively, if not, correct them. Under the style section, there will be the MACD, signal and zero line with their default colors on the chart.
3. Confirm that oscillator MA type and signal line MA type selected with the option " EMA" and not "SMA" because EMA refers to exponential moving average which is quickly responsive to new information and sudden price changes compared to SMA called simple moving average.
4. According to the type of trade that you are going to place, it could be intraday, swing or positional trade, chose the timeframe of indicator, by default, it will be according to the timeframe of the chart.
5. You can further customize the settings according to your trading strategy.
How to read the MACD indicator?
The process of reading MACD indicator involves understanding the components of MACD and interpreting the signals that it generates.
Components of MACD
1. MACD line: Technically this line represents the relationship between two ema of a security's price by comparing 12 and 26-period exponential moving averages.2. Signal line: It plays an important role in generating buy and sell signals as it uses 9-period exponential moving average.
3. Histogram: The Histogram visually represents the distance between the signal line and MACD line with other indications in the movement of price.
4. Baseline: The line with zero units, stands as a base for a histogram known as a baseline.
Interpretation of MACD indicator
1. MACD line and Signal line crossovers
◉ Bullish Crossover: When the MACD line crosses above the signal line, it indicates that there might be a good chance of positive change in the trend of the market and a better time to enter the market to make a buying position.◉ Bearish Crossover: When the MACD line crosses below the signal line it is a sign of a negative trend in the price of the respective security which suggests that it is time to square off the position and make a selling position in the market.
2. Histogram Analysis
◉ Above Zero Line: When the bars of the histogram are above the zero line, it is an indication of bullish momentum as they form when the MACD line is above the signal line.
◉ Below Zero Line: Whenever the bars of the histogram are below the zero line, it is a sign of bearish momentum as they form below when the MACD line is below the signal line.
◉ Increasing Histogram Bars: When the bars of the histogram increase in height they indicate that the sstrength of trend is going to increase as a bullish if it is above the zero line or bearish below zero line.
◉ Decreasing histogram Bars: When there is a decline in the height of bars of the histogram it signals a weakness in strength of a trend.
◉ Bearish Zero Line Crossover: When the MACD line crosses below the zero line it is a sign of a shift in the market from positive to negative momentum and a bearish reversal as it occurs when the 12-period ema has crossed below the 26-period ema.
◉ Bearish divergence: This type of divergence occurs when the market makes higher highs and MACD makes lower highs resulting into a decline in the price of security being traded, such kind of divergence considered as a Bearish divergence.
Here are some MACD-based strategies
1. MACD line and Signal line crossover: Whenever the MACD line crosses above the Signal line it is a sign that the market may turn its trend into a bullish trend indicating a buying signal but before making any trades solely based on crossover, see for other parameters, whether any candlestick or chart pattern forming at point of crossover or not, analyze the strength of trend with the help of bars on histogram with the confirmation of volume to sense the data about numbers of market participants. Whereas, whenever there is a crossover of MACD below the signal line, it indicates that the price may experience a reversal in a downtrend and this is the time to square-off buying position and create a new selling position in the market, but again here don't depends upon just the crossover, validate it with other parameters to increase the probability of successful trades.
2. Zero Line crossover: when the MACD crosses above the zero line then there is a chance of having a positive momentum in the market that indicates to buy the security, when it crosses below the zero line it reflects that the market is going to change its trend to bullish and potential time to sell or square-off the position. well, it is important to have a confirmation with other parameters before having any kind of position in the market as it may lead to a false shift in trend.
3. MACD Divergence: Sometimes the movement of price and MACD don't follow similar kind of trend though the MACD is a trend-following indicator such types of situations are called divergence between the price and MACD. Whenever the price moves creating lower lows and MACD creating higher lows then this kind of situation conveys that the current trend is weakening with time and there may be a chance of a reversal in the trend of the market which is a good sign for traders want to make buying position in the market. On the other hand, whenever the price moves following subsequent higher lows and MACD lower lows, it might be a message that the trend will make a shift from positive to negative and it could be a healthy time for sellers to make an entry in the market and also alert for buyers to round-off their position. It is not necessary every time that MACD will give a correct view, if is used in combination with other technical tools, its accuracy can be increased.
◉ Below Zero Line: Whenever the bars of the histogram are below the zero line, it is a sign of bearish momentum as they form below when the MACD line is below the signal line.
◉ Increasing Histogram Bars: When the bars of the histogram increase in height they indicate that the sstrength of trend is going to increase as a bullish if it is above the zero line or bearish below zero line.
◉ Decreasing histogram Bars: When there is a decline in the height of bars of the histogram it signals a weakness in strength of a trend.
3. Zero Line Crossovers
◉ Bullish Zero Line Crossover: When the MACD line crosses above the zero line, it means that 12 period EMA has crossed above 26 period EMA which is considered as a bullish signal and there may be a shift in trend from negative to positive.◉ Bearish Zero Line Crossover: When the MACD line crosses below the zero line it is a sign of a shift in the market from positive to negative momentum and a bearish reversal as it occurs when the 12-period ema has crossed below the 26-period ema.
4. Divergences
◉ Bullish Divergence: When the price makes lower lows but at the same time MACD makes higher lows that means there is a divergence in price and MACD line which indicates that the market may show a potential reversal in the upward direction leading to convert the downtrend into uptrend.◉ Bearish divergence: This type of divergence occurs when the market makes higher highs and MACD makes lower highs resulting into a decline in the price of security being traded, such kind of divergence considered as a Bearish divergence.
MACD Trading Strategies
The accuracy of MACD indicator is 60-70% therefore it is not necessary that the market will always move according to the indication of MACD indicator, therefore while trading, based on MACD, always have the look upon other confirmational parameters to increase the probability of successful trades. Make sure that it doesn't work properly when the market is in its consolidation state.Here are some MACD-based strategies
1. MACD line and Signal line crossover: Whenever the MACD line crosses above the Signal line it is a sign that the market may turn its trend into a bullish trend indicating a buying signal but before making any trades solely based on crossover, see for other parameters, whether any candlestick or chart pattern forming at point of crossover or not, analyze the strength of trend with the help of bars on histogram with the confirmation of volume to sense the data about numbers of market participants. Whereas, whenever there is a crossover of MACD below the signal line, it indicates that the price may experience a reversal in a downtrend and this is the time to square-off buying position and create a new selling position in the market, but again here don't depends upon just the crossover, validate it with other parameters to increase the probability of successful trades.
2. Zero Line crossover: when the MACD crosses above the zero line then there is a chance of having a positive momentum in the market that indicates to buy the security, when it crosses below the zero line it reflects that the market is going to change its trend to bullish and potential time to sell or square-off the position. well, it is important to have a confirmation with other parameters before having any kind of position in the market as it may lead to a false shift in trend.
3. MACD Divergence: Sometimes the movement of price and MACD don't follow similar kind of trend though the MACD is a trend-following indicator such types of situations are called divergence between the price and MACD. Whenever the price moves creating lower lows and MACD creating higher lows then this kind of situation conveys that the current trend is weakening with time and there may be a chance of a reversal in the trend of the market which is a good sign for traders want to make buying position in the market. On the other hand, whenever the price moves following subsequent higher lows and MACD lower lows, it might be a message that the trend will make a shift from positive to negative and it could be a healthy time for sellers to make an entry in the market and also alert for buyers to round-off their position. It is not necessary every time that MACD will give a correct view, if is used in combination with other technical tools, its accuracy can be increased.
4. MACD Histogram Reversals: The histogram is an important constituent of the MACD indicator as it visually represents the strength as well as the trends of the market. Whenever the transition of histogram bars starts from negative to positive, with the confirmation of other technical tools, it can be an indication of having a buying position in the market as it reflects a sign of a bullish trend. Similarly, the convergence of bars from positive to negative indicates trend reversal with a bearish nature leading to have a selling position in the market.
Common Mistakes to Avoid While Using MACD
Using MACD can improve the efficiency of a trader but the common mistakes that most of the trader don't focus on, can significantly affect their performance in trading. Having a look at and understanding the root cause of them definitely help the trader to sort out them.1. Ignoring the Overall Trend
When traders analyze the chart on a shorter time-frame, the trend might look positive but the overall trend could be negative, in this kind of situation MACD may lead you according to the trend in the market that could change right after the end of a shorter time frame, such kind of situations are common when the market is in a consolidation phase. Therefore, It is necessary to have a look upon overall trend of the market with confirmation of other parameters especially for analyst who analyse the market on shorter time-frame.2. Depending Only on the MACD to Make Trades
Once the MACD found satisfying the required conditions for trend reversals, traders often get trapped in its false signals, as we earlier discussed that indicators just indicates and not provide the confirmation to traders, MACD being an indicator it has its own limitations and success rate of 60-70% and not 100%, therefore without prior confirmation of other technical indicators and parameters it is going to affect your performance significantly.
3. Overlooking Time -Frame Relevance
Sometime traders adjust the time frame setting of MACD indicator manually and thus it acts according to the selected time frame and not according to time-frame on the basis of which traders are going to trade next time which becomes a part of the problem as if it is applied for shorter time-frame, it will results an unsightly appearance on the chart, that is why it is essential to confirm all the settings before having it to our setup.
The moving average convergence divergence ( MACD) is one of the popular and powerful indicators that is definitely present in most of the trader's toolkit, although it has certain limitations but when it is used in combinations of multiple technical parameters its limitations can be bypassed to some extent. When a trader follows a proper system, effective strategies, multi-indicator-based approach then the chances of successful trades can be improved. To boost trading performance using MACD effectively it is highly important to focus on the strategies that make use of MACD histogram identification for momentum changes early that guide a trader to have a look over a potential trend reversal in the market before they actually occurs in the live market. Use multi-timeframe assessment of the market where you can use the MACD on a higher timeframe to analyze the overall trend of the market to get an idea about potential movements of the market while use it on a shorter timeframe to improve the accuracy. Furthermore, keep eye on MACD divergence, whenever the price and MACD move in opposite directions there are possible chances of having a potential upcoming trend reversal. Customize the settings of MACD indicator that suits a specific assets and trading styles, to optimize the signal reliability use the different EMA periods. At last, Make sure to backtest any of these strategies to check the outcomes and the efficiency of that strategy before having practical implementation in the live market.
1. What is the best MACD setting for day trading?
↪Sure, here are the key points that one could focus upon to have the best MACD settings for day trading
Practical Tips for Effective Trading with MACD Indicator
In Closing
For a trader It is highly important to widen the approaches and strategies to have a step up in their journey, that is why they should experiment with different kinds of tools available in the market in different situations to build effective strategies, one such kind of tool known as MACD indicator has been popular among the trader for its simplicity and effectiveness in assesing the market. There are multiple indications of the market which this indicator analyzes and conveys traders in a much simpler and better way so that they could participate the potential moves in the market. Making use of different kinds of signals also help the traders to predict the future move of the market for that trader needs to understand the signals that it indicates. Although it has certain limitations but with proper techniques and systems they can be minimised.Need to Know
1. What is the best MACD setting for day trading?
↪Sure, here are the key points that one could focus upon to have the best MACD settings for day trading
Standard Settings
You can customize it according to market conditions and strategies that you have
- Fast EMA: 12
- Slow EMA: 26
- Signal Line: 9
You can customize it according to market conditions and strategies that you have
- Fast EMA: 12
- Slow EMA: 26
- Signal Line: 9
Customization for Volatility
- For highly volatile assets, consider
- Fast EMA: 8
- Slow EMA: 18
- Signal Line: 5
- For highly volatile assets, consider
- Fast EMA: 8
- Slow EMA: 18
- Signal Line: 5
Backtesting
- Test settings on historical data to ensure they fit your trading strategy.
Combination with Other Indicators
- Use MACD alongside other indicators like RSI or Bollinger Bands for more accurate signals.
2. How do I identify MACD divergence accurately?
↪To catch the moment where you can accurately identify the MACD divergence you need to compare the price with MACD lines. Keep your eyes on the instances where the price makes higher highs but MACD moves by making lower highs such kind of situation signals that there could be a reversal in the current trend of the market while when the MACD is about to make lower highs and price is in the opposite direction, it is a sign of potential weakening in the current trend in the market. Confirm the divergence by checking the histogram, if it signals in the direction of divergence it validates the strength of divergence.
3. Can MACD be used to predict the tops and bottoms of the market?
↪ Yes, it can be used to predict the tops and bottoms of the market by proper analysis of divergence, MACD crossover, histogram analysis and zero line crossing as these all are the signs of reversal in the market which either occur from bottom or top of the chart.
- Test settings on historical data to ensure they fit your trading strategy.
Combination with Other Indicators
- Use MACD alongside other indicators like RSI or Bollinger Bands for more accurate signals.
2. How do I identify MACD divergence accurately?
↪To catch the moment where you can accurately identify the MACD divergence you need to compare the price with MACD lines. Keep your eyes on the instances where the price makes higher highs but MACD moves by making lower highs such kind of situation signals that there could be a reversal in the current trend of the market while when the MACD is about to make lower highs and price is in the opposite direction, it is a sign of potential weakening in the current trend in the market. Confirm the divergence by checking the histogram, if it signals in the direction of divergence it validates the strength of divergence.
3. Can MACD be used to predict the tops and bottoms of the market?
↪ Yes, it can be used to predict the tops and bottoms of the market by proper analysis of divergence, MACD crossover, histogram analysis and zero line crossing as these all are the signs of reversal in the market which either occur from bottom or top of the chart.
4. How does the MACD perform in the ranging market?
↪ In a ranging market which means when the market does not follow a strong trend and moves in a particular range then this indicator has to face problems like false signals, and choppy histograms with reduced in it's effectiveness.
