David Waring

MACD: Learn to Use the MACD Indicator (Part I)

In our last lesson we learned about the different ways people trade with moving averages. In this lesson we are going to learn about the Moving Average Convergence Divergence (MACD) an indicator that is built using moving averages, but is set up to give a good indication of the momentum of a particular financial instrument as well as its trend.

The indicator, which was developed by Gerald Appel, is constructed by taking a 12 period exponential moving average of a financial instrument and subtracting its 26 period exponential moving average. The resulting line is then plotted below the price chart and fluctuates above and below a center line which is placed at value zero. A 9 period EMA of the MACD line is normally plotted along with the MACD line and used as a signal of potential trading opportunities

Example of what a MACD looks like on a chart:


When the MACD line is above zero this tells the trader that the 12 period exponential moving average is trading above the 26 period exponential moving averages. When the MACD line is below zero this tells the trader that the 12 period exponential moving average is below the 26 period exponential moving average. Traders will watch the MACD line as when it is above zero and rising this is a sign that the positive gap between the 12 and 26 EMA’s is widening, a sign of increasing bullish momentum in the financial instrument they are analyzing. Conversely when the MACD line is below zero and falling this represents a widening in the negative gap between the 12 and 26 day EMA’s, a sign of increasing bearish momentum in the financial instrument they are analyzing.

Example of Rising and Falling MACD lines:


The purpose of the 9 period exponential moving average line is to further confirm bullish changes in momentum when the MACD crosses above this line and bearish changes in momentum when the MACD crosses below this line.

Example of the Signal Line


Lastly many traders and charting packages will plot a histogram along with the MACD which is representative of the distance between the MACD and its signal line. When the MACD histogram is above zero (the MACD line is above the signal line) this is an indication that positive momentum is increasing. Conversely when the MACD histogram is below zero this is an indication that negative momentum is increasing.

Example of the MACD histogram


When the MACD histogram is above zero (the MACD line is above the signal line) this is an indication that positive momentum is increasing. Conversely when the MACD histogram is below zero this is an indication that negative momentum is increasing. The higher or lower the histogram goes above or below zero the greater the momentum of the trend is thought to be.

Other Links to Help You Learn About MACD

MACD - Wikipedia, the free encyclopedia
Incredible Charts: MACD Indicator
Trading The MACD Divergence

That completes this lesson. You should now have a good understanding of the different components that make up the MACD indicator. In our next lesson we are going to go over some of the different ways traders use the MACD in their trading so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!

Unregistered

Hi David!

As it seems, the black line reacts faster. When the asset moves up or down, the black line reacts faster compared to the blue line. This implies that the black line will be above the blue line when the asset increases fast in value, and when the asset declines rapid in value, the black line falls steeper and naturally falls under the blue line. This also implies that a gap always exists naturally.

Honestly I dont really understand how this can be used as a trading tool. Some how the goal must be to predict the outcome of the underlying asset, but how is that possible?

The only way I can see how EMA and MACD can be used is to analyze the gap. When the gap shrinks its time to sell or buy, and preferably before the lines crosses each other in order to not run the risk of buying/selling too late. Am I correct?

Best regards!

/Fredrik Magnusson

David Waring

Hi Fredrik,

Glad to hear from you.

The blue line is a 9 period EMA of the black line so yes the black line is always going to react faster than the blue line.

If you are referring to the gap between the two lines then yes this is one way that some traders use the indicator. When the gap is wide and growing they know that momentum is on the side of the gap and when it is small and shrinking they know that momentum is moving in the opposite direction.

Let me know if that does not make sense or if there are any other questions.

Best Regards,
Dave

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Swedish

Hi again!

I registered some hours ago, but its me again. It makes sense what you wrote, and I think I got it!

Thanks for the answer!

Best regards,

/Fredrik Magnusson

David Waring

My pleasure Fredrik welcome to the community.

Best Regards,
Dave

__________________
InformedTrades University | IT Shopping Guide | Site Map


Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

forexer

Hi david,

so is the macd better for trending or ranging market? I guess its the former? It is also a momentum indicator and not an oscillator right?

David Waring

Hi Forexer,

Glad to hear from you.

The MACD can be used in both ranging and trending markets, although generally I think most traders use it more in trending markets than ranging. It is both a momentum indicator and an Oscillator.

Hope that helps.

Best Regards,
Dave

__________________
InformedTrades University | IT Shopping Guide | Site Map


Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Forexjam

hi dave..

i dont understand where do the 12 , 9 , 26 come from.. why those numbers? these macd and the blue line.. follow the same principle as the moving average crossovers.. when the moving short av. crosses over the moving long av. traders get long, and short when it crosses below.....

forexer

Hi forexjam,

these are just settings most commonly used in the MACD. You can set them again if you wish. MACD is a very easy and cool indicator to use and since you can geta free fxcm demo account, go try it out , play around with it and come back when you find anything you don't understand.

See you around.

Forexer

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Don't be manipulated by the markets.
Learn to manipulate your own mind.

Forexjam

hey forexer

thanx for ur post, um.. you say that i can set them again.. but the thing is that i dont quite understand how they came to be, so i cant really set them again cuz i dont know where to go, nor do i understand how to set them or why.

however if this is not an important or crucial matter then its ok. but if on the other hand understanding this is crucial for my trading then could u please explain?.. thank you


James.