MACD

Moving Average Convergence Divergence

About MACD

It is a momentum trend-following indicator which measures relationship between two moving averages. MACD line/histogram is calculated by substracting the longer EMA (usually 26) with the shorter EMA (usually 12). Standard setting for MACD is 12, 26, 9. Moving average of the MACD line/histogram is called the “signal line”.

In its simplest form, relationships between MACD line/histogram with signal line can act as trigger for BUY and SELL signals. MACD helps traders understand whether momentum in the current up move/down move is getting stronger or weaker.

The most common methods to utilize MACD are signal line crossovers and divergences.

Trading Application

Signal Line Crossover

BUY when MACD line/histogram crosses above the signal line. SELL when MACD line/histogram crosses below the signal line.

Divergences

When price rises and MACD line/histogram falls, we have bearish divergence. When price falls and MACD line/histogram rises, we have bullish divergence.

Signal Line Crossover

BUY at open of the next bar/candle when MACD line/histogram crosses above the signal line. Some examples can be seen on the chart as represented by the blue circles and blue arrows. Blue circles show when MACD crosses above signal line. Blue arrows show the corresponding trades.

SELL at open of the next bar/candle when MACD line/histogram crosses below the signal line. Red circles on the chart below show when MACD crosses below signal line. Red arrows show the corresponding trades.

Divergences

Prices and MACD in general move in the same direction. When prices and MACD move in opposite direction, we have a divergence. There are 2 types of divergence: bearish divergence and bullish divergence.

Bearish divergence happens when price rises but MACD falls or do not rise. This indicates that up move is losing momentum and could reverse down. Area marked “1” on the chart below shows a bearish divergence. Prices continued to rise but MACD was falling. Prices then broke lower and reversed direction from up to down.

Bullish divergence happens when price falls but MACD rises or do not fall. This indicates that demand is strong and building up momentum. Area marked “2” on the chart below shows a bullish divergence. Prices moved lower but MACD was rising and building momentum. Prices then broke higher and reversed direction from down to up.

MACD can also be used together with other indicators such as moving average

Moving Average time period 12 & 26 on H1 chart

The above chart shows EMA(26) in red, EMA(12) in blue. When EMA(12) crosses above EMA(26), this indicates price is rising. BUY signal is then confirmed by MACD line/histogram (blue bars) being above the MACD base line (zero line). Conversely, EMA(12) crosses below EMA(26) indicates price is falling. SELL signal is confirmed by MACD line/histogram being below the MACD base line (zero line).

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