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MACD is one of the most popular technical indicators used by day traders and investors. It’s also one of the most misunderstood technical indicators out there. A lot of beginners will look at it, scratch their heads and wonder why they’re not making any money with this indicator. The truth is MACD can be very effective if you know how to use it properly, but it also requires a high level of skill in order to use it correctly. In this article, we will teach you how to use the MACD Indicator to profit from day trading properly.
What is MACD?
MACD, which stands for Moving Average Convergence/Divergence, is a technical indicator most commonly used to measure trend strength in the stock market. It comes from a class of indicators called momentum oscillators, which analyze the speed and direction of price movements.
The MACD is a trend-following momentum indicator that can be used to confirm the direction of a trend, identify a trend reversal, and serve as an aid for entry and exit points in the market. was developed by Gerald Appel, who introduced it in 1978 in his book “Trading For A Living.” Appel created the indicator to measure momentum in markets with the intention of using it for day trading. The indicator is available on most charting platforms, including TradingView and StockCharts.
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The MACD Indicator Explained
The MACD indicator is an oscillator that shows the relationship between two moving averages. The indicator design allows traders to see when a security’s momentum is changing, which can be used to identify buying or selling opportunities. The indicator can be used alone or in conjunction with price action; either way, it is a powerful tool for technical analysis.
A MACD Indicator typically comprises four lines: the MACD line, Signal line, Zero line, and histogram.
MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. The result is then plotted against a signal line (9-day EMA) to form two lines on a chart. It is usually represented as the blue line on a MACD Indicator.
This is calculated as the 9-day exponential moving average of the MACD line. The signal line reacts slower to price changes, unlike the MACD line. It also represents the intersection between MACD Line and Zero Line; when MACD Line crosses Zero.
The histogram in a MACD indicator is a graphical representation of the difference between two moving averages of prices. The concept behind this indicator is when prices are above the signal line, it suggests that the trend is up, and when they are below, it means the trend is down.
This line represents the center of the MACD indicator.
MACD Example
If you’re looking for how to use the MACD indicator, take a look at this chart;
The trading chart above is a 15-minute BTC/USD chart. However, the MACD indicator has been applied with its typical settings, MACD (12-26, EMA, 9, EMA), which can be seen below the chart. Traders can apply the MACD Indicator on any chart, and for any asset class such as stocks, forex, or crypto, to predict trends.
In the chart above, the blue line is the MACD. The red line is called the Signal Line, and the bar chart between them is called the histogram. Lastly, the center where the MACD line, signal line, and histogram meet is called the zero line.
Now that you have a visual understanding of what the MACD looks like, you may be wondering how to read a MACD chart and how it works. Next, we will explain how the indicator functions and how you can apply different MACD strategies to profit.
How Does The MACD Indicator Work?
The two moving averages in a MACD indicator, are plotted on top of each other to create a sort of envelope wave pattern. The red line, or Signal Line, moves in accordance with the price action of a stock, while the bar chart in the middle, or histogram, serves as a visual representation of momentum. When prices begin to increase, the histogram increases until it crosses above the signal line. Likewise, if prices begin to decrease then, the histogram decreases until it falls below its original position. The MACD histogram also shows the strength of momentum.
The standard interpretation of the MACD is that it gives us a signal when the shorter-term average crosses above or below the longer-term average. That means, the signal line and the MACD line serve as a trigger for buy and sell signals by providing confirmation when prices fall below or rise above the intersection. When prices are above both lines, this indicates an uptrend; when they drop below both lines, this indicates a downtrend; when they move sideways without crossing either line, a flat market is likely to develop; but if prices cross below their respective averages then there may be trouble ahead for stocks or assets being monitored by traders using this indicator.
Trading Strategies To Use with MACD
There are many strategies that can be used to trade with the MACD indicator. The following are proven methods that will help you win more trades.
The Crossover strategy
The MACD crossover strategy involves buying when bearish crossovers occur and selling when bullish crossovers occur. It’s suitable for both short-term day traders looking at hourly charts as well as long-term investors who look at weekly charts or higher time frames still.
The Divergence Strategy
The divergence strategy uses divergences between price and one or more indicators—like RSI—to identify turning points in a trend before they happen. This strategy works best when applied on longer time frames like weekly charts or higher because it requires several data points in a row before making its call; if applied incorrectly, it will produce many false signals and leave you with lots of losing trades that offset any profits made from successful ones.
Combine the MACD Indicator with Moving Averages
Utilize a MACD strategy that works like combining the MACD Indicator with 100 EMA. If the price is below the 100 EMA line, it indicates that the trend is down. If the price is above the 100 EMA line, it indicates that the long-term trend is up.
Using Bollinger Bands With MACD
Another strategy that you can use is to use Bollinger Bands with MACD. You simply place your Bollinger Bands on top of your moving average and then use standard deviation or some other indicator such as RSI or Stochastic Oscillator to measure overbought/oversold levels in conjunction with your bands. When you get a reading from these indicators, you will know when it’s time to enter or exit a trade according to your predetermined rules.
Daytrading With The MACD
Traders often use the MACD indicator to determine whether they should go for long or short positions in the market. When using the MACD indicator for day trading, you want to look at short-term trends rather than long-term trends. You should use daily charts when utilizing the MACD Indicator because they have more data points than hourly charts, which makes it easier to spot trends in price action as they occur throughout the day.
You can use MACD to determine whether prices are likely to continue moving higher or lower by looking at how fast they are moving compared to their recent past performance. For example: if the price is making new highs and the MACD is rising more quickly than normal, there may be more upward momentum than usual behind these moves up in price. This could mean that further gains are possible if you were considering entering into a long trade because there will likely be little resistance left once those levels have been broken through based on how far above them prices have risen thus far.
Using the histogram on the MACD, traders can determine whether an asset’s price is about to move in their favor or against them. When this histogram turns upward from below zero on a chart, it indicates that buyers are becoming more aggressive and could indicate an upcoming uptrend for an asset’s price over time. Conversely, when this histogram turns down from above the zero line on a chart, it indicates that sellers are becoming more aggressive and could indicate an upcoming downtrend for an asset’s price over time. Traders will typically use this indicator along with other indicators to confirm signals or make trading decisions based on what they see on their charts.
Depending on your trading style, you can use MACD along with other indicators such as RSI or stochastic so that you can spot trends quicker before they happen. Traders can use other combinations of days and time frames. There are multiple variations from which to choose, so be sure you understand what each one does before using it in your daily trading routine.
How To Profit With The MACD Indicator?
If you’re a trader looking to stay ahead of the market, then MACD is for you! The MACD indicator is easy to understand, and its best suited for short-term trades. MACD can be combined with other technical analysis tools to plot price action, which gives you more information about where the market is heading. Other ways to use MACD to profit include;
Watch Out for Buy Signals
When the MACD line crosses above its signal line, this is considered a buy signal, which means that you should buy at least one contract of an underlying asset (stock, exchange-traded fund [ETF], etc. Once your position has reached its profit target and starts declining again, you should exit your position immediately because it may go back down again.
Watch Out for Sell Signals
When the MACD line crosses below its signal line, this is considered a sell signal, which means that you should sell at least one contract of an underlying asset (stock
Use a Stop Loss To Protect Your Investment
The next thing we’ll cover is how stop losses work in conjunction with this trading strategy. A stop loss order places an automatic sell order when your trade goes against you by a certain amount in order to protect your investments from further losses; however, if your market moves favorably towards your entry point, then there’s no need for using one because everything will be fine anyways!
Utilize Other Indicators Along With MACD
Like most technical indicators, MACD is not foolproof. Do not open trading positions based on the MACD indicator alone. Traders should use MACD in conjunction with other technical indicators like momentum, volume, and stochastics to help confirm signals before entering trades.
Set Your Price Alerts
You can also benefit from setting alerts when certain levels are crossed, so you can execute trades quickly when signals appear on your chart.
Key Takeaways
- The MACD line is measured by the difference between two exponential moving averages (EMAs) of an asset’s closing prices.
- The MACD line is calculated as the 12-day EMA subtracted from the 26-day EMA, showing a shorter-term trend than the signal line.
- The signal line is the 9-day EMA of the MACD line, showing a long-term trend.
- When the MACD line and Signal line cross one another, they form histograms or “MACD bars”.
Conclusion
I hope you found this article helpful, and it helped give you a better understanding of how to use the MACD indicator in day trading.
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