MACD: A Primer

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It is important to thoroughly understand how MACD works and combine it with other forms of analysis before making trading decisions. This information has been prepared by IG, a trading name of IG Markets Limited. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it.

For example, a bullish crossover may indicate a strong buy signal, while a bearish divergence may indicate a strong sell signal. For a 5-minute chart, consider faster MACD settings like 5, 13, and 6. These increase responsiveness to short-term price movements but may also increase false signals. It might seem strange, but using multiple MACD indicators with different settings can help traders find more reliable signals. For instance, traders can use a fast MACD (like 8, 17, 9) and a slow MACD (like 19, 39, and 9) to filter out false signals and focus on stronger trends.

What Are MACD Divergences?

Optimus Futures, LLC does not imply that you cannot find better tools or opposing valid views to our opinion. We do our best to share things based on our experience and scope of expertise. Signal Line – The signal line is a 9-period exponential moving average of the MACD line. MACD Line – The 26-period exponential moving average (EMA) is subtracted from the 12-period EMA. This calculation results in a value that oscillates above and below zero.

  • A long signal is generated by an oversold MFI reading and a bullish cross of the MACD lines.
  • Having characteristics of both leading and lagging indicators, along with a moving average trigger line, the MACD presents the kind of versatility and multifunctionality traders covet.
  • Traders should use it with other tools and market information to make the best trades.
  • The MACD line is the primary component plotted, and it represents the difference between two exponential moving averages (EMAs) of price data.
  • Hence, the Moving Average Convergence Divergence (MACD, pronounced Mac D)—a variation of the moving average crossover developed by Gerald Appel.

Recommended settings for the 1-minute chart are a Fast Length of 5, a Slow Length of 13, and a Signal Length of 6. One way a long-term trader can make use of the MACD indicator is shown in Figure 1.3, where buy and sell signals are generated by crossing of the MACD and the signal line. Note that this is a weekly chart; a time period that’s more appropriate for longer-term trading. The blending of MACD and Hull Moving Averages (HMA) aims to refine the basic MACD moving average strategy by reducing lag and improving responsiveness. This combination is often cited as one of the best MACD trading strategies, leveraging the strengths of both indicators. The Hull Moving Averages used here are the 21-period and 50-period HMAs.

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However, the MACD-histogram is a mean reversion indicator, and there are probably other and better indicators for that, like for example, the RSI indicator. MACD is calculated by subtracting a 26-period exponential moving average (EMA) from a 12-period EMA, producing the MACD line. A 9-period EMA of the MACD generates its signal line for identifying crossovers and divergence signals. These real-life examples show the effectiveness of the MACD indicator when used with other technical analysis tools and proper risk management techniques.

  • Moving Average Convergence Divergence(MACD) is regarded as one of the most important indicators in technical analysis as it can identify opportunities across financial markets.
  • This bearish divergence warned of the impending downturn of the S&P 500 future and the market as a whole.
  • Note that the previous indicators can be used in mix and not only one.
  • These colors help traders quickly see the relationship between the two lines and find possible trading signals.

No doubt many traders would have thought Bitcoin was way overbought and would have potentially shorted every time the trigger line crossed below the MACD stock indicator. This approach would have proven disastrous as Bitcoin kept grinding higher. The prior potential buy and sell signals might get a person into a trade later in the move of a stock or future.

Best MACD trading strategies

This indicator is popular, simple to calculate, and can be used to trade a wide variety of assets. The MACD works by comparing an asset’s performance over several recent time periods to determine if it will rise or fall in the near future. Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.

macd trading techniques

As we mentioned, there are three components to the standard MACD. Additionally, combining the MACD with other tools can help increase your odds of this being an effective strategy. Elearnmarkets (ELM) is a complete financial market portal where the market experts have taken the onus to spread financial education. ELM constantly experiments with new education methodologies and technologies to make financial education effective, affordable and accessible to all.

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It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. At the top (#5), the price made higher highs whereas the MACD made lower highs. A divergence signals a loss in trend momentum and is a strong reversal pattern. As we know from our moving averages article, a cross of two Moving Averages shows a change in momentum and it can often foreshadow the start of a new trend. MACD measures the relationship between two EMAs, while the RSI measures price change in relation to recent price highs and lows.

Sometimes, despite a signal being theoretically bullish or bearish, the trend does not play out in practice. Since the MACD line is the ‘fast’ line, registering trend shifts quicker than the ‘slow’ signal line, a growing histogram indicates strong positive momentum. On the other hand, a shrinking histogram, which threatens to enter negative territory, is a bearish sign of poor momentum.

Analyzing the Signal Line

This article will focus the most popular indicator used in technical analysis, the moving average convergence divergence (MACD). A bearish crossover happens when the MACD line goes below the Signal line. That suggests a possible downtrend, which could be a sell or short signal for traders. Just like bullish crossovers, other analysis tools and market context should be used to confirm the signal and reduce false signal risk.

However, if you choose to use MACD, the best time to use the indicator will depend on which of the above strategies you’re looking to utilize. This method should be used carefully, as the delayed nature means that fast, choppy markets would often see the signals issued too late. However, as a tool for providing reversal signals of long sweeping moves, this can be very useful. Gerald Appel, the indicator’s creator, chose the default settings of 12, 26, and 9. They provided a good balance between responsiveness and reliability in his tests.

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