Home Learn Chat room
  RSI Bollinger bands  

The MACD indicator

Summary:

MACD is the acronym for Moving Average Convergence/Divergence.
It has been developed in the late 1970s as a momentum oscillator.
It helps you to:

The MACD indicator

It has 3 major components:

The calculations are pretty easy to understand, and are simply derived from EMAs:

MACD formula

MACD formula

MACD formula

The values of 12, 26, and 9 are all configurable in indicator's settings.

As you see, MACD is derived from the EMA indicator: we first have to calculate the two 12 and 26 moving averages (applied on the candles closing price), then subtract them. MACD is an indicator of an indicator.
The signal line is even more derived, since it's an indicator of the MACD.
Then at the end of the chain come the histogram, derived from the MACD and the signal line.

They are all many steps away from the price itself. It's not necessarily bad, but we have to keep in mind that those tools are lagging indicators: they lag behind the price, the entry/exit signals you get will be a bit late. However, this decreases the odds of erroneous alerts, thus reducing the chances of getting ambushed in short-lived and rapidly-reversed moves.
But still, false signals will happen. As with the MACD, experience will sharpen your analytic skills and you will get less and less involved in trappy movements.

I remind you that the usefulness of MAs are reduced during consolidation periods, the same warning apply to the MACD.

Signal crossover

The crossing of the signal line is a very used technique.

When the MACD cross the signal line to go above it, it's a bullish cue.
When the MACD cross the signal line to go below it, it's a bearish cue.

MACD crossing with signal

Zeroline crossover

The crossing of the zeroline is another easy way to use MACD.

When the MACD goes above the zeroline, it's a bullish cue.
When the MACD goes below the zeroline, it's a bearish cue.

MACD zeroline crossing

Divergences

As with the RSI, you can use the concept of divergences and hidden divergences with the MACD.
Here are two examples:

Bearish divergence resulting in a reversal Bullish divergence resulting in a reversal
MACD bearish divergence MACD bullish divergence

Divergences can results either in reversals or in pauses. They don't give you an exact timing about when you should take action. They are simply here to tell you to be careful, because the momentum is lowering.

Histogram

Signal crossover anticipation

The histogram appeared in 1986, it has been developed to anticipate signal crossovers: if successful, this results in bigger profits. However, this comes with higher risks and losses if the market doesn't move as forecasted.

When the MACD is above the signal line, the histogram is positive.
And vice-versa, when it goes below the signal line, the histogram is negative.

The nearer is the MACD to the signal line, the smaller is the histogram bar. When it gets really small, it looks like it could reverse to its opposite side: that's how you anticipate the crossover.

Divergences

You can also use divergences on the histogram.

Bearish divergence resulting in a reversal Bullish divergence resulting in a reversal
MACD bearish divergence with histogram MACD bearish divergence with histogram

Exercises

TweetShare on Twitter FacebookShare on Facebook RedditShare on Reddit Linked InShare on Linkedin Linked InShare on Telegram DeliciousShare by mail

Comments

Should you have any question or remark, feel free to post it. I will answer you as soon as possible!


I want to receive cool and useful mails from The Trading Dojo
We don't spam nor share e-mails

#1 Samuel Jun 17 '19

This website is awesome!

  RSI Bollinger bands