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Mastering The Macd

The MACD is a momentum indicator that uses the difference between two exponential moving averages to identify trends and momentum changes. It comprises a MACD line, signal line, and histogram. Crossovers of the MACD and signal lines indicate trend reversals, while divergences between price action and the MACD can signal trend weakness. The indicator is widely used across different time frames and asset classes to identify momentum shifts.

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3K views4 pages

Mastering The Macd

The MACD is a momentum indicator that uses the difference between two exponential moving averages to identify trends and momentum changes. It comprises a MACD line, signal line, and histogram. Crossovers of the MACD and signal lines indicate trend reversals, while divergences between price action and the MACD can signal trend weakness. The indicator is widely used across different time frames and asset classes to identify momentum shifts.

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saran21
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INTERMEDIATE

7. Mastering
the MACD
H A N T E C R E SE A R C H WE B INARS - Technical Analysis Series

What is the MACD?


The MACD, or Moving Average Convergence/Divergence is widely used technical analysis study. It is effectively a
hybrid indicator, which comprises both elements of momentum and moving average analysis.

The indicator uses two exponential moving averages, which help to measure momentum in the price. The
MACD Line is simply the difference between these two moving averages plotted against a centre line. The
centre line is the point at which the two moving averages are equal. Along with the MACD and the centre line,
an exponential moving average of the MACD itself is plotted on the chart to produce the Signal Line. The idea
behind this momentum indicator is to measure short-term momentum compared to longer term momentum to
help signal the current direction of momentum.

Calculation of the MACD Line and Signal Line


The most common moving average values used in the calculation of the MACD Line are the 26 period and 12
period exponential moving averages. The Signal Line is commonly created by using a 9 period exponential
moving average of the MACD values. These values can be adjusted to meet the needs of the technician and the
instrument. For more volatile instruments, shorter term moving averages are used while less volatile securities
should have longer moving averages. Once more the MACD is an effective analysis tool across a number of
different time frames.

MACD Histograms
Another aspect to the MACD indicator that is often found on charts is the MACD histogram (or Forest as some
software programmes will refer to it). The histogram is plotted on the centre line and represented by bars.

Each bar is the difference


between the MACD
and the Signal line (in
most cases the 9 period
exponential moving
average). The higher the
bars are in either direction,
the greater the distance
between the MACD and
the Signal lines which
implies more momentum
behind the direction in
which the bars point.
Figure 1:
The Moving Average Convergence/Divergence lines and histogram for Sterling/Dollar
1
7. Mastering the MACD

H A N T E C R E SE A R C H WE B INARS - Technical Analysis Series

Reading the MACD and Signal Lines


When the MACD Line is positive (above the zero neutral line) it signals that the shorter term moving average
(i.e. on a daily chart, the 12 day exponential moving average) is above the longer term moving average (i.e. the
26 day exponential moving average). With the nearer term average price higher than the longer term average
price, this suggests that the price momentum has been getting stronger. Therefore, a positive MACD suggests
the current price has upward momentum.
When the MACD is negative (below the zero line) this signals that the shorter term is below the longer, which
suggests that he current price has downside momentum.
The MACD line will cross over the centre line, as the two moving averages cross over. This would suggest that
the MACD lines can be used to signal bullish or bearish trends depending upon their configuration.
In Figure 1, during mid-July 2013, the MACD and Signal lines are rising but are still below the zero line, which
can just mean that a bear market recovery is underway. However, as the trend strengthens, the shorter moving
average has now crossed above the longer moving average. This now implies a strengthening outlook, which is
shown by the MACD line passing into positive territory (above zero). Once the Signal line has also moved into
positive territory, the trend is now considered to be bullish.

Crossovers and Kisses Using the Signal Line and the MACD Histogram
The Signal Line is used to generate trading signals. Being an exponential moving average of the MACD Line,
the Signal Line will lag the MACD. However, when the MACD line begins to move back towards the Signal Line
then we begin to get some trading signals such as a Crossover or a Kiss.
When the MACD Line crosses over the lagging Signal Line this is indication of a reversal. However, if the two
lines just come together and “kiss” before moving back in the same direction, this can also be a powerful
continuation signal.

It is also beneficial to watch


the MACD Histogram, as
the histogram can give
early warning signals of
a trend maturity. The
histogram moving through
the zero line depicts the
crossover of MACD and the
Signal lines. Furthermore is
there is a divergence on the
MACD Histogram with the
price this can be an even
stronger warning.

Figure 2: MACD crossovers and kisses on Sterling/Dollar

2
7. Mastering the MACD

H A N T E C R E SE A R C H WE B INARS - Technical Analysis Series

Divergences
Technical analysts would look for divergences with either the lines or the histogram to indicate a slowing of the
strength of the trend (in either direction). This would subsequently be an early indication of a change in the
direction of the trend.

Here in Figure 3, the MACD


lines are consistently
making lower highs, whilst
the MACD Histogram is also
doing the same. The big
warning signal comes with
the highs in late November
and early December where
the MACD histogram
fluctuates around the zero
line. When the MACD
line (red falls sharply
away below zero this is
confirmation that the trend
Figure 3: MACD bearish divergence on Euro/Dollar
was reversing.

3
H A N T E C R E SE A R C H WE B INARS - Technical Analysis Series

Trust Through Transparency

Hantec House, 12-14 Wilfred Street, London SW1E 6PL


T: +44 (0) 20 7036 0888
F: +44 (0) 20 7036 0899
E: info@hantecfx.com
W: hantecfx.com

Risk Warning for Educational Material

This document is issued by Hantec Markets Limited, who is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, No.
502635. The document is prepared and distributed for information and education purposes only.

Trading in Foreign Exchange (FX), Bullion and Contracts for Differences (CFDs) is not suitable for all investors due to the high risk nature of
these products. Forex, Bullion and CFDs are leveraged products that can result in losses greater than your initial deposit. The value of an FX,
Bullion or CFD position may be affected by a variety of factors, including but not limited to, price volatility, market volume, foreign exchange
rates and liquidity. You may lose your entire initial stake and you may be required to make additional payments. Please ensure you fully
understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. Before deciding to enter into
FX, Bullion and/or CFD trading, you should carefully consider your investment objectives, level of experience, and risk appetite. You should
only invest in FX, Bullion and/or CFD trading with funds you are prepared to lose entirely. Therefore, only your excess funds should be placed
at risk and anyone who does not have such excess funds should completely refrain from engaging in FX and/or CFD trading. Do not rely on
past performance figures. If you are in any doubt, please seek further independent advice.

This document does not constitute personal investment advice, nor does it take into account the individual financial circumstances or
objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does
not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such. All of the
views or suggestions within this document are those solely and exclusively of the author, and accurately reflect his personal views about any
and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this document to undertake
trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.

Figure 4: Range trading using the Bollinger Bands on Silver

T: +44 (0) 20 7036 0888 │| F: +44 (0) 20 7036 0899 |│ E: info@hantecfx.com │| W: hantecfx.com

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