David Waring

MACD Indicator Lesson, Part II

In our last lesson we looked at the different components that make up the MACD indicator. In today’s lesson we are going to look at how traders use the MACD to identify whether or not a market is trending, how strong that trend is, and where good potential entry and exit points are.

As we learned in our last lesson the MACD indicator is used to identify trends in the market and the momentum of those trends. Because of this the MACD is an indicator that traders will look to trade when the market is trending and avoid when the market is range bound.

In addition to being able to tell if the stock, futures contract, or currency you are analyzing is trending or not from simply looking at its price action on the chart, you can also use the MACD indicator. Very simply if the MACD line is at or close to the zero line, this indicates that the financial instrument you are analyzing is not exhibiting strong trending characteristics, and thus should not be traded using the MACD.

Example of Identifying Trending and Non Trending Markets with MACD


Once it is determined that the financial instrument you are analyzing is exhibiting trending characteristics, there are three ways that you can trade the MACD.

1. Positive and Negative Divergence
2. The MACD/Signal Line Crossover
3. The zero line crossover

Trading the MACD Divergence:

Divergence occurs when the direction of the MACD is not moving in the same direction of the financial instrument you are analyzing. This can be seen as an indication that the upward or downward momentum in the market is failing. Traders will thus look to trade the reversal of the trend and consider this signal particularly strong when the market is making a new high or low and the MACD is not.

Example of MACD Negative Divergence


Trading the MACD Crossover

This is the simplest way to trade the MACD as it involves simply watching the MACD line and going long when the MACD line crosses above the signal line and going short when the MACD line crosses below the signal line. As this strategy generates the most signals, it also generates the most false signals, and the potential to get into a bad trade using just this method is high. For this reason traders will confirm the signals with other methods such as the chart patterns we have learned so far, volume etc.

Example of Using the MACD Crossover as Buy and Sell Signals


The MACD Zero Line Crossover:

The MACD zero line cross over occurs when the MACD crosses above or below the line plotted at point zero on the indicator. When this occurs it is an indication that market momentum has reversed direction. The strength of the move that can be expected as a result of this depends on what has been happening in the market, and what has been happening with the indicator. If the market and the MACD are both coming off of recent new highs then this could be considered a strong signal. If the market is simply trading in a weak trend or range and the MACD has simply crossed from just above to just below the zero line, then this would be considered a weak signal.

Example of a Bullish and Bearish Zero Line MACD Cross:


As with all of the indicators that we are learning about in this series it is normally better to trade the MACD along with other confirming signals such some of the things we have learned so far like trend lines, chart patterns, and breaks of significant support resistance levels.

Links to Help You Learn to Trade the MACD Indicator

MACD: Learn to Trade the MACD Indicator, Part I
MACD - Moving Average Convergence/Divergence - Technical Analysis
AlphaTrends: Moving Average Divergence Oscillator - MACD

That completes our lesson for today. You should now have a good understanding of the MACD and situations where it helps traders predict future price action and how it can be used to place trades. In our next lesson we are going to look at more Oscillators and look at how to trade the relative strength index (RSI).

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!

duncan

Hello David,

First of all I would like to thank you for the free courses you are giving. I find them of big help and I am sure that others who just entered into the forex trading world are doing the same.

I have a question if you don't mind. What other technical analysis would go well with MACD. I know that you need to be careful before entering a trade and therefore one needs a couple of indicators if not more. Can you please suggest what else I might use ?

many thanks..

Duncan

David Waring

Hi Duncan,

Glad to hear from you and thank you for the compliment I am glad you like the videos.

You can find the answer to your question which I posted for another trader at the link below:

http://www.informedtrades.com/10095-...ach-other.html

If you have any further questions or comments on this one please feel free to post them there.

Best Regards,
Dave

smaksy

Hello David!
Wow! Your free courses are very interesting and I thanks a lot for this service!
Sorry for my bad english but I'm Italian, so I hope you can understand.
So, 2 things:
1) In your opinion, when is the best moment to entry in position after that a divergence is recognised on the chart?
2) A confirmation please. Is it correct that I have to go long when the Macd crosses over the Signal Line and I have to go Short when the Macd crosses under the Signal Line?
Thanks so much!
Smaksy

David Waring

Hi Smaksy,

Thanks for the comment I am glad you like the videos and welcome to the community.

I wouldn't worry about your english it sounds pretty good to me.

The answer to this question in my opinion is really going to depend on what else is happening on the chart at the time you see the divergence. For instance if a trader's strategy says that he or she trades with the longer term trend and they spot a divergence on a shorter term chart that goes against the longer term trend, then this is not a trade that they are going to take because it is against their strategy.

So I cannot give a specific answer here but in general what I think most traders will do with things like this is get a feel for the short, medium, and long term trend in the market using multi time frame analysis and then confirm the divergence with at least one other indicator. Once this is done I would pick the entry point based on where support and resistance was located on the short, intermediate, and longer term chart.

While you of course do not have to do anything when either of these things happen, yes the general strategy when trading the MACD crossover is to go long when the MACD crosses above/over the signal line and short when the MACD line crosses under the signal line.

If there are any other questions or comments on this one feel free to post them below.

Best Regards,
Dave

yang2062

Hi

A very resoureful and informative web site for a new traders like me thks and cheers

I have a question few quesiton on MACD, pls kindly give me yr best advise

1) when the look the at weekly charts macd show down trends but daily charts it show up trends so which one shld i follow ?
2) the histrogram in the macd , what are the set up and trends we can see from there ?
3) as for the chart below . is it shown a change of price even in a down trend, below zero line when i see a divergence , still good to long ,
4) for day trading what are the best set up for MACD


Again , thks for the work on the website , cheers

Yang2062

Attached Thumbnails

 

David Waring

Hi Yang2062,

Thanks for the comment I am glad you like the site.

I think most traders would agree that ideally you want to have everything line up across all time frames with your technical analysis. Like in life however perfect setups such as this rarely happen in the market so unless you are super long term and willing to wait until they do a trader must decide how sensitive he or she is to conflicting signals on different time frames.

For me personally, I like to be aware of what is happening on the monthly and weekly chart mainly from just a trendline/support resistance standpoint and then I start using my indicators on the daily charts.

So as an example here if there was an MACD divergence on the Daily chart that did not show up on the weekly chart this would not affect my market bias and trade selection. If this was showing on an hourly chart but not the daily however then I would not personally base the trade on the divergence on the hourly chart because I would want a confirmation from the daily chart. This is my style however and I encourage you to play around with this yourself to see what fits your style.

Here is a good article on the MACD Histogram.

Yes the chart that you have attached shows a divergence in the MACD. Traders who trade divergences are by definition trading against the trend looking for the market to reverse direction. Some traders never trade against the trend, others do this is simply a matter of preference and what fits your trading style.

There are many setups that can be traded with the MACD all of which can be good for day trading depending on what the situation is. Below is a list of all of the resources on this site related to the MACD so you can explore this question further and find out what works best for your own trading style.

macd Threads - Forum Tags by Zoints

Hope that helps. If there are any other comments or questions on this one please feel free to post them below.

Best Regards,
Dave

kawola17

Hello Dave,

Thanks for all your videos once again. Hey, on the MACD, do you use the closing price?

(Do you use closing price for moving averages too? I remember reading somewhere this, but not sure.)

Thanks in advance!

Sincerely,
Bill

David Waring

Hi Bill,

Good to hear from you.

Yes on all indicators I tend to use whatever the default is which for moving averages and MACD is the close.

Best Regards,
Dave

Michael

Hi David,
In the Forex market is there anyone time frame better suited for MACD trading compared to another. As always, thanks for all you do it is greatly appreciated.

Michael