What is the MACD indicator? Maximise Trading Profits Today!

MACD (Moving Average Convergence Divergence) is one of the most widely used tools in the hands of traders. A go-to for trend identification, momentum changes and buy/sell signals If you’ve been on the fence of utilizing the MACD properly, this blog post unpacks it for you in an easy, practical and executable manner.

 

MACD Indicator Explained

A trend-following momentum indicator showing the relationship between two moving averages of a security’s price, the MACD The below is composed of three main parts:

1. MACD Line: difference between 12 period and 26 period Exponential Moving Average (EMAs) MACD Line is the heart of MACD
2. Signal Line: 9 period EMA of MACD line Used to trigger buy or sell signals
3. Histogram– The simple visualization of the difference between MACD line and signal line. A simple technique to calculate momentum

The MACD comes in a chart on its own below your price chart, which makes it very easy to interpret without cluttering your primary view.

Tips to Use MACD Effectively

1. Crossover Signals

The rudimentary use of the MACD is to find crossovers:

• Bullish crossover: When the MACD line crosses above the signal line, a buy signal.

• Bearish Crossover: When MACD line crosses below Signal line it is a sell signal.

Example: think of a stock that has been in downtrend. Ok, so now the MACD is crossing above its signal line. This could be said to be a signal that trend momentum is turning back up, buy signal.

2. Divergence

Divergence between the MACD and the price chart can signal potential reversals:

• Bullish Divergence: Price makes a lower low, but the MACD forms a higher low. This suggests the downtrend is losing strength.
• Bearish Divergence: Price makes a higher high, but the MACD forms a lower high. This indicates the uptrend might be running out of steam.

Example: If a cryptocurrency’s price is rising to new highs, but the MACD is making lower highs, it could be a warning sign to take profits.

 

MACD Best Practices

1. Use with Other Indicators: The MACD alone is pretty good, but put it with tools like the RSI or in combination with support and resistance levels and you have something special.
2. Never Use a Choppier Markets: The MACD works best with trending markets. Sideways markets can churn out a large amount of false signals.
3. Stick to a Plan: You always want to be using risk management tools, such as stop-loss orders to safeguard the capital you have left.

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