4/27/2020 The MACD indicator - How To Use The MACD Correctly -

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THE MACD INDICATOR – HOW TO USE THE MACD CORRECTLY

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 Rolf |  indicator, moving average, Rolf, tips, Trading Method, Trading Tool |  Indicators, Price Action,
Technical Analysis, Tradeciety Academy |  17

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The MACD is a popular momentum and trend-following indicator that is based on the information of moving
averages and, thus, ideal to act as an additional momentum tool and momentum lter for your trading. In this The new Tradeciety
article, we will explain what the MACD indicator does, how it helps you analyze price and how to use it in your Masterclass is here
own trading. here

First, let’s take a look at the individual components of the MACD indicator:

MACD Line: The MACD line is the heart of the indicator and by default it’s the di erence between the 12-
period EMA and the 26-period EMA. This means that the MACD line is basically a complete moving average
crossover system by itself.

Signal Line: The Signal line is the 9-period EMA of MACD Line

MACD Histogram: MACD Line – Signal Line

In this article, we focus on the MACD and the signal line in particular. The histogram is derived from the other two
components of the MACD and, thus, don’t add as much explanatory value to overall MACD trading.

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The basics of the MACD indicator

As I said, the MACD is based on moving averages ad this means that it’s ideal for analyzing momentum, nding
trend-following entries and staying in trends until momentum is dying o .

There are 2 MACD signals in particular that we will explore in this article and explain step by step how to use
the MACD to nd trades:

1) The MACD Line cross 0

Besides the MAXD lines, I also plotted the two moving averages on the charts and it becomes obvious
immediately how the MACD works.

When the two MAs cross, the MACD line crosses below 0 as well. As  I said above, the MACD is thus its own
moving average crossover system in just one line.

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As we know from our moving averages article, a cross of 2 MAs shows a change in momentum and it can often
foreshadow the creation of a new trend. So, whenever the MACD Line crosses 0, it shows that momentum is
changing and potentially a new trend is just being created.

1) The Signal Line

When you see the two MACD indicator lines move away from each other, it means that momentum is
increasing and the trend is getting stronger. When the two lines are coming closer to each other, it shows that
price is losing strength.

However, the MACD is an oscillator and during very strong trends, it won’t give very accurate information. Thus,
when you are in a strong trend, don’t get confused by too many crossings of the MACD lines.

TIP: As long as the MACD lines are above 0 and price is above the 12 and 26 EMAs, the trend is still going
on.

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Trend-following entry
During ranges, the two lines from your MACD are very close together and they hover around 0; this means that
there is no momentum and no strength.

At point #1, the price also formed a narrow range and when the price breaks out, the two indicator lines pull
away from the 0 line and also separate each other. Then, during a trend, the moving averages can act as
support and resistance and stay you in trends as the phase #2 and #4 show – the price never broke the moving
averages.

During a consolidation like in point #3, the MACD contracts sharply as well and traders wait for the breakout of
the wedge to signal a new trend.

The divergence at#5 is a signal we will explore below and it predicted the reversal. During the downtrend #6,
the price then again stayed below the moving averages while the MACD lines stay below 0.

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MACD divergences as early entries

MACD divergences are another great way to analyze price and nd early trend-following trades.

You can see in the screenshot below how the price was moving higher very slowly over a long period of time. At
the same time, the MACD moved lower showing that there was no buying strength behind the slow grind.
Then, suddenly, price broke below the two moving averages with stronger which happened while the MACD
lines crossed below 0 and also separated further. This can be the signal of a new strong downtrend.

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Overall, as with most indicators, you probably don’t need them when you can read momentum information
directly from your chart. But indicators can be great tools for building con uence and also to create more
objectivity in your trading.

HOWEVER, never let anyone tell you that indicators don’t work. They do! It just comes down to how you use
them.

COMMENTS ( 17 )

Aek
10 Apr 2018

Very clear explanation Rolf Thank you.

REPLY

David
13 May 2018

This is a really good article. In fact the best I’ve read on this indicator

REPLY

Joseph
07 Jun 2018

Finally! I get it. Clarity and brevity at its best. Much Obliged.

REPLY

FAbanobi
14 Jul 2018

I am most grateful for your time to teach such a hard subject as abstract as it is in an elementary
way. Be blessed!

REPLY

Iso Jasie
27 Jul 2018

Hugely simpli ed and crystal clear. Thank you for sharing!

REPLY

Salome
07 Aug 2018

Very clarifying.

REPLY

Adeyemo Ayobami

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10 Aug 2018

Thanks man, may God continue to bless your brain.

REPLY

Deepak gulshan
14 Aug 2018

which time frame is suitable for investment priod 1month, 3 month, 6 month, 1 year, 5 year

REPLY

BeeTrade
22 Dec 2018

Thanks for the explanation. Something I am trying to examine is what about identi cation of
change in vector direction. If you think of going over the crest of a roller coaster, and the
opposite below 0. I have been experimenting with this in a paper trade account, with some
success. What I have found though, it can turn against me quickly. But I would really like to know
how to describe this in a screening program.
Thanks for your insight !!

REPLY

Ceri Aston
02 Apr 2019

HI,

I found your MACD trading strategy very helpful. What is the best way to close a trade? Would
you close out a trade when the 12 ema crosses the 26 ema?

Thanks

Ceri

REPLY

Mohan
24 Apr 2020

When MACD crossover.

REPLY

Volkan
24 May 2019

You use daily MAs but view it on 4hr charts?

REPLY

Terrek
30 May 2019

Man, its a great work on how to use the MACD. Its a stand alone indicator. All what one needs is
PATIENT. May God continue to add more to your brain.

REPLY

Kabelo
08 Jun 2019

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it is the great pleasure for me to read this amazing article because i thought i know how to use
this indicator but indeed it seems as if i was using them incorrectly . thank you so much

REPLY

Anonymous
14 Feb 2020

thank you Sir!

REPLY

Anonymous
10 Mar 2020

Clear & concise

REPLY

Mohan
24 Apr 2020

It’s amazing explanation… I found that MACD indicators how it works in all market after spent
long time.. Here also I found same what I want.

Here I wanted to add something new, if MACD and EMA cross over is not clear about the trend
then change to higher time frame and nd direction of price movement. example if you use
5min timeframe and trend is not clear using EMA and MACD, then change to 15min time frame
and trend should be very clear. In addition to that use volitile indicator to con rm whether we
need to trade or not at this time.

REPLY

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