What is MACD in trading?
‘MACD’ is short for Moving Average Convergence Divergence. It’s a very popular indicator, invented by Gerald Appel in the 1970’s, that can be used to spot trends that help traders work out when to enter a trade.
How does it work?
Essentially, MACD is a trend momentum indicator which takes two moving averages and works out the difference between them. For more information about moving averages.
MACD turns the two moving averages into a momentum oscillator which makes it easier for the trader to visualise.
The standard MACD has three main components. The MACD line worked out by subtracting the 12-day Exponential Moving Average from the 26-day Exponential Moving Average. The second line is the signal line which is simply the nine bar Exponential Moving Average of the MACD. The last component is the difference between these lines which shows up as a histogram in the indicator window.
How to trade with MACD
MACD is a really useful indicator for spotting short-term moves and a lot of traders use it to time their entry into the market. There are three main methods to do this:
Main MACD methods:
- When the MACD line turns down and crosses below the signal line, that signals a downward trend.
- When the MACD line turns up and crosses above the signal line, that signals an upward trend.
- As the histogram shows the difference between the two averages, it can be used to predict the strength of the trend – the bigger the histogram, most often the stronger the trend.
- As an oscillator like RSI and Stochastic, divergences may occur to foreshadow a trend reversal.
Be careful though… MACD can provide false signals like any other indicator so it’s better to use it in combination with other indicators, like RSI and Price Action.
How to add MACD
- Adding MACD to your Skilling charting platform is simple:
- Type MACD into the indicator dropdown menu and select MACD.
- The settings screen for the MACD are now displayed.
- You can use the default input data or enter your own. You can also change the colour settings for your MACD chart.
- Click the OK button to add the MACD to your charting platform.
MACD is another popular indicator and one you are likely to come across often. Traders like it as it provides different ways to generate signals and also can give indications on trend. So, if you are the type of trader who would prefer to only look at one indicator when you trade, then perhaps MACD might be for you.
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