The best way to use the MACD indicator is with other tools that may give a confirmation signal when using it alone could lead to false signals and unnecessary losses. Many indicators test better on a Heikin Ashi chart due to the smoothing effect on prices. Over 20 years, a buy-and-hold investor would have made 39,975% with Apple, but a MACD trader would have made only 961%. As you can see, while the day trading margins were tight, the Heiken Ash chart was a better setting for day trading than the OHLC candles. MACD beat buy and hold on 15 of the DJ30 stocks, giving a ratio of 50%, versus the OHLC trade with only a 26% success rate.

  1. For example, if a security’s price makes a new high but MACD does not, then the two are diverging, with MACD indicating decreasing momentum in the security’s upward movement.
  2. No, the MACD indicator is inaccurate; it causes many small losses and misses good entry points.
  3. As you can see in the figure below, transaction signals are generated when the MACD line (the blue line) crosses through the signal line (nine-period EMA – orange line).

It can provide a trader with an indication of whether a trend is likely to continue or reverse. When combined with other indicators and signals, MACD can form the basis of a trading forex trading 24 hours strategy. A nine-day EMA of the MACD line is called the signal line, which is then plotted on top of the MACD line, which can function as a trigger for buy or sell signals.

The best time frame to use with the MACD depends on the type of trade, instrument, and stock that you’re interested in creating and executing a strategy for. Nevertheless, the MACD technical indicator made a clear lower low from Low #1 to Low #2. This bearish divergence warned of the impending downturn of the S&P 500 future and the market as a whole. This occurs because there is a change in direction or a slowdown in the stock, future, bond, or currency trend.

What does MACD stand for?

Generally, these are the twelve-day and 26-day EMA, calculated based on each day’s closing price. The Moving Average Convergence Divergence oscillator was developed by Gerald Appel in the late 1970s. Over time, the indicator established itself as one of the simplest and most effective technical analysis tools. It’s simple because when it is used, all that traders have to look for is the convergence and divergence of the two EMAs.

This is easier to interpret than looking at the two lines alone, since it is sometimes difficult to tell if one curve is steeper than the other. The histogram is positive when MACD is higher than its nine-day EMA, and negative when it is lower. The signal line is calculated by taking the difference between the two EMAs, and from that number create a nine-day moving average. Downward or upward turns in the MACD histogram towards the zero line always precede MACD crossover signals.

period Simple Moving Average

This oscillator moves between 0 and 100 where readings below 20 are oversold and 80 are considered overbought. A positive MACD value, created when the short-term average is above the longer-term average, is used to signal increasing upward momentum. This value can also be used to suggest that traders may want to refrain from taking short positions until a signal suggests it is appropriate.

How to read MACD indicator

We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances. We recommend that you seek independent advice and ensure you fully understand the risks involved before trading. The zero cross strategy is based on either of the EMAs crossing the zero line.

The MACD indicator thus depends on three time parameters, namely the time constants of the three EMAs. The most commonly used values are 12, 26, and 9 days, that is, MACD(12,26,9). As true with most of the technical indicators, MACD also finds its period settings from the old days when technical analysis used to be mainly based on the daily charts. The reason was the lack of the modern trading platforms which show the changing prices every moment. As the working week used to be 6-days, the period settings of (12, 26, 9) represent 2 weeks, 1 month and one and a half week.

The best software for detailed trading strategy development and technical analysis is TrendSpider. The Moving Average Convergence Divergence (MACD) is a technical indicator used mostly to identify trends in trading. There are many better indicators than MACD, such as the rate of change and Donchian Channels. Our testing has proven these indicators to be much more effective, work on many timeframes, and are more successful in trading strategies.

The MACD indicator can help you spot powerful signals like a crossover or a divergence. Learning to use it for accurately predicting the formation of new trends will significantly improve your trading. The start of a trend is usually where most of the money is made after all.

Three common MACD trading strategies

Secondly, divergence doesn’t forecast all reversals, i.e., it predicts too many reversals that don’t occur and not enough real price reversals. One of the most significant risks is that a reversal signal can be a false indicator. For instance, the zero-cross image above has a point where the MACD crosses from below and back again in one trading session. If a trader entered a long position when the MACD crossed from below, they would be left with a losing stock if prices continued to fall. The money flow index allows traders to use price and trading volume to identify and determine when assets are overbought or oversold in the market.

MACD vs stochastic Copied Copy To Clipboard

No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. The chart above depicts Wells Fargo’s (WFC) daily price chart data from April 2020 to June 2021.

At the most basic level, the MACD indicator is a very useful tool that can help traders ensure that short-term direction is working in their favor. I test all indicators, including the MACD, on their standard recommended settings, on different timeframes, and using different chart types; this provides an unbiased result. Also, the entry and exit prices use an average of the high and low prices for the day, making the testing more realistic. A moving average is a technical indicator for smoothing out price trends by filtering out the “noise” from random short-term price fluctuations. When MACD forms highs or lows that that exceed the corresponding highs and lows on the price, it is called a divergence.

Moreover, this indicator might signal a potential reversal, but it doesn’t tell traders when that reversal may happen. Investors should remember the MACD only signals possible reversals, not guaranteed forecasts. As its name implies, the MACD is all about the convergence and divergence of the two moving averages. Divergence occurs when the moving averages move away from each other. The shorter moving average (12-day) is faster and responsible for most MACD movements. The longer moving average (26-day) is slower and less reactive to price changes in the underlying security.

Another advantage of the MACD is it can be a relatively simple indicator. Investors can pair the MACD with other technical indicators for a more comprehensive analysis. Divergence happens when the moving averages move away from each other. Convergence happens when the moving averages move towards each other.

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