The MACD (Moving Average Convergence Divergence) indicator is probably the simplest and most used element of the technical analysis in the world. This is actually the difference between two Moving Averages – EMA (12) and EMA (26) are the default settings. If you are confused by this abbreviation, please refer to our Moving Average page, or if you need a quick reminder – this is Exponential Moving Average. Although this is a combination of two trend indicators, the MACD is a momentum indicator, because it illustrates the strength of the trend and the possible trend reversals.
The default setting for the MACD are (12, 26, 9), because the indicator’s founder, Gerald Appel, himself found out the they are the best for both fast and slow markets. However, you are free to experiment with more responsive or less responsive settings, but we recommend sticking with the defaults.
If you have seen an equity trading platform, you might feel slightly confused. The MACD used in the stock trading has one additional element – a second line. Here is the brief explanation: in stocks the MACD has a signal line, a MACD line and a histogram; in Forex MACD has a histogram (equal to the MACD line in stocks) and a signal line.
Here is how the MACD indicator is calculated. First of all, when you open the settings tab, you will find three input fields that are the periods that you should to have, as we said, it is better to stick with the defaults. The rest of the settings are the same as those in the Moving Average indicator, because as we said MACD is actually a combination of two moving averages. The formula is:
MACD Histogram: EMA(period 1 = 12 by def.)(close price) minus EMA(period 2 = 26 by def.)(close price)
Signal Line: EMA(period 3 = 9 by def.)(MACD)
Previously, we said that the MACD indicator is very easy to use, so we will now explore two of the most common trading signal that you can get from this indicator.
As you already know, the divergence is a very common signal in the oscillators or momentum indicators. This signal indicates a possible reversal in the trend, but you have to confirm the signal with other tools and indicators. However, if you can confirm the divergence with a cross over, then you have a strong signal.
A crossover is created when the Signal line crosses the MACD histogram. Generally speaking, if the histogram bars are below the zero line, then you should prepare for an uptrend and vice versa. Let’s take a look at the example in the image. If we take a look at the first signal, we had one crossover in the lowest point; after that the Signal line (red dotted) headed upwards and the histogram bars were above it. This was a signal that indicated a possible buy, but you already know that you have to confirm your signals. As we observe the MACD, we soon notice that a new low was being formed and once again we had a crossover, but this time the bars were below the Signal Line. The important thing here is the divergence that was created, because this means a second buy signal. Then we notice another crossover, which is identical to the first one, this is a third buy signal and we should have definitely opened a buy or maybe we did :)
Another buy signal is when the histogram bars come from the negative zone and reach the 0 or even enter the positive zone and vice versa. The MACD bars move faster than the Signal line, which is why this is a signal for buy.
To sum it up, nether the crossovers nor the MACD volume nor the divergence alone are sufficient to open a deal, but if you find yourself in a situation where two or even three of them are present, then this is a powerful signal. Just take a look at the first buy signal: we have two crossovers, a divergence and later on the MACD volume reaches the 0 and even enters the positive zone.Stochastic Indicator Relative Strength Index - RSI Ichimoku Kinko Hyo
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