How To Read MACD Indicator in 5 Easy-to-Follow Steps

how to read the macd

The difference between the two lines is represented on the histogram. If the MACD were to be trading above the zero line, it would confirm an uptrend, below this and the indicator would be used to confirm a downtrend. The letter “T” represents when the top or peak of the moving average convergence divergence histogram occurs. In contrast, the letter “B” shows when the bottom of the MACD histogram occurs. ” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

During the trending phase (#4) the MACD stayed above the 0-line once again. 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, doesn’t add as much explanatory value to overall MACD trading.

how to read the macd

When that occurs, the MACD line is getting closer to the MACD signal line. You’ll get access to a few videos and then you’ll be contacted by someone on my team. It’s not for everyone, but if you’ve read this far you’ve already shown your determination. Apply today — it could end up being one of the best decisions you’ve ever made.

A MACD histogram’s vertical bars above and below the zero centerline visually indicate positive and negative momentum. Crosses above and below the centerline represent the same information as positive and negative crosses of the signal line on a MACD line chart. The default parameters for most MACD calculations take the difference between a 12-period EMA and a 26-period EMA to create an oscillator around zero. MACD is known as a “centered-oscillator” because a cross above or below the zero centerline signals a change in momentum.

Learning from MACD

The zero cross strategy is based on either of the EMAs crossing the zero line. If the MACD crosses the zero line from below, a new uptrend may be emerging, while the MACD crossing from above is a signal that a new downtrend may be starting. In yet another bearish sign for the E-mini S&P 500 futures contract, the future made higher lows from Low #1 to Low #2, which again is usually considered positive. When a stock, future, or currency pair is moving strongly in a direction, the MACD histogram will increase in height.

Margin trading and leverage are powerful tools in the arsenal of online traders. At its essence, margin trading allows traders to borrow funds to… Indicators can be a great addition to your trading since they provide objective and easy-to-interpret information. Especially for trend traders, the MACD can be a helpful indicator because it analyzes trends and momentum effectively. The price entered a sideways consolidation period at point #3. The MACD pulled back all the way to the 0-line during the consolidation.

What the MACD Indicator is and How it Works

These indicators both measure momentum in a market, but because they measure different factors, they sometimes give contrary indications. Either indicator may signal an upcoming trend change by showing divergence from price (price continues higher while the indicator turns lower, or vice versa). The chart below highlights the potential to utilise the MACD histogram as a trading tool. By waiting for two counter-trend moves in the histogram, it mitigates the chance that such a move will be a one-off rather than a reversal. By using the tool in the direction of the trend, the chart below highlights three profitable trades and one losing trade. A trader can also use the tool for exiting the trade, with positions exited once the MACD starts to reverse into the opposite direction.

  1. Looking at the E-mini S&P 500 future, from High #1 to High #2, the futures contract made higher highs, which is usually viewed as bullish.
  2. The screenshot below shows the MACD line and the Signal line at the bottom of the chart.
  3. Given this construction, the value of the MACD indicator must be equal to zero each time the two moving averages cross over each other.
  4. MACD is often displayed with a histogram (see the chart below) that graphs the distance between MACD and its signal line.

This bearish divergence acted as an early warning sign of things to come with the E-mini S&P 500 futures contract. Notice in this example how closely the tops and bottoms of the MACD histogram are to the tops of the Nasdaq 100 e-mini future price action. This occurs because the MACD is accelerating faster in the direction of the prevailing market trend. A potential buy signal is generated when the MACD (blue line) crosses above the MACD Signal Line (red line).

What is MACD?

In other words, while they give you some idea about momentum and help smooth out price action, they do not predict the future. Whereas RSI is bounded between 0 and 100, the MACD is unbounded, making it more useful in trending markets than for identifying overbought and oversold conditions. Because the indicator measures momentum, analysts believe the price action will follow the momentum.

Some traders consider it one of the most reliable of technical indicators. The accuracy of an indicator is subjective and varies based on many factors. Divergence indicates changes in direction of a trend, as well as overbought and oversold conditions. MACD is arguably the most popular, but many different indicators are used to identify divergence. Downward or upward turns in the MACD histogram towards the zero line always precede MACD crossover signals. When the price broke below the two moving averages with a strong selling period, the MACD also started breaking below the 0-line.

MACD vs. Relative Strength

They might say something like, “This is the next Microsoft.” It’s not. But if they say it enough and everything else lines up right, the stock might make a brief run. The third part of the MACD indicator is the divergence line or zero line (depending on which convoluted definition you pay attention to). The reason the MACD is considered a momentum oscillator is because it oscillates around the zero line. The default 12, 26, and 9 settings of the MACD can be adjusted to create more or fewer signals from the indicator.

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). 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. On the other hand, falling negative MACD values suggest that the downtrend is getting stronger, and that it may not be the best time to buy.

If you choose a lagging strategy, you’d have to be watching your MACD indicator a lot to receive the signals as quickly as possible. But if you chose a leading strategy, like the histogram, you might be able to spend less time monitoring your MACD, as the signals should present themselves ahead of time. Looking at the E-mini S&P 500 future, from High #1 to High #2, the futures contract made higher highs, which is usually viewed as bullish. Traders get valuable insight from the MACD in the form of potential buy and sell signals. The primary method of interpreting the MACD is with moving average crossovers. The MACD indicator, also known as the MACD oscillator, is one of the most popular technical analysis tools.

Traders should be aware that the whipsaw effect can be severe in both trending and range-bound markets because relatively small movements can cause the indicator to change directions quickly. A large number of false signals can result in a trader taking many losses. When commissions are factored into the equation, this strategy can become very expensive. In the previous examples, the various signals generated by this indicator are easily interpreted and can be quickly incorporated into any short-term trading strategy. 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.

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