For those of you who have never heard about the MACD indicator, prepare to feel like you’ve found the perfect tool to add to your trading strategy.
The MACD indicator is one of the most popular technical analysis indicators for traders. Whether trading crypto, stocks or forex, the MACD is brilliant tool for confirmations and reversal predictions too.
What is MACD
The MACD is an indicator. It shows "convergence" and "divergence" between two exponential moving averages. How they move toward and away from one another.
Ultimately, the MACD is a variation of moving average crossovers — a more simple strategy.
- What does MACD stand for?
- What is convergence?
- What is divergence?
- What type of indicator is MACD?
- How does the MACD work?
- How to read MACD?
What does MACD stand for?
MACD stands for "moving average convergence divergence".
What is convergence?
Convergence is when two lines move towards one another.
What is divergence?
Divergence is when two lines move away from one another.
What type of indicator is MACD?
This is a tricky one, because the MACD can be interpreted in a number of ways. It can fill the role of both a trend indicator and a momentum indicator. It is both leading and lagging, dependant on how it is used.
How does the MACD indicator work?
The MACD indicator is built up of 2 parts;
- The MACD — the difference between a 12 period EMA and a 26 period EMA. (26EMA – 9EMA.)
- The signal line — a 9 period EMA of the MACD line.
What does the MACD indicator tell you?
The MACD tells you few things;
- What the trend is; either bullish or bearish.
- What the momentum of price change is
How to read the MACD indicator
Lets explore the ways in which you can read MACD indicator, and what to look for.
The MACD crossover strategy is based on trading signals when the MACD line and signal line crossover one another. This can often signal a change in momentum.
MACD buy signal
As the MACD line crosses upwards over the signal line, this is a buy signal.
MACD sell signal
As the MACD line crosses downwards over the signal line, this is a sell signal.
How to use MACD
The MACD is offered by most exchanges, if that’s where you’re trading. For example, cryptocurrency exchanges — Binance, Kucoin, Kraken, etc — will allow you to pull up the MACD indicator on their price charts.
However, I’d personally go with TradingView, where you can easily add the MACD indicator to any chart or currency pair of your choice.
Best MACD settings
Usually, the MACD is setup with the following inputs
- Faster moving average — 12 period simple moving average
- Slower moving average — 26 period simple moving average
- Signal — 9 period exponential moving average
- Price — close price
However, dependant on your style of trading, the MACD can be used in a number of different ways.
- Best MACD settings for day trading
- Best MACD settings for swing trading
- Best MACD settings for scalping
For Day Trading
When day trading, the settings are usually kept the same as above, however, lower time frames will be used; ie. 15 mins to hourly crossovers in the short-term.
For Swing Trading
The same idea applies for swing traders, keep the 12, 26, 9, settings the same, but adjust your timeframes to the periods that you are looking to trade over. Hourly to daily, weekly, monthly.
Scalping is a more complex area. You can use the same settings, but you can also edit them to be more sensitive by reducing the values. However, you should be careful about altering settings, this will reduce the the number of traders that are seeing the same signals significantly.
How to calculate MACD
You don’t need to calculate the MACD to use it, but if you’re keen to find the formula for the MACD, here’s the calculation.
fastEMA = 12 EMA slowEMA = 26 EMA signalSMA = 9 SMA MACD = slowEMA - fastMA