MACD Indicator Guide – MACD is one of the most popular indicators used by most of the traders in trending market. This indicator is mostly used to evaluate the strength and direction of the ongoing trend in the market. Gerald Apple in 60s developed it as the simplest and easiest to use and grasp. Since, the EMAs are price sensitive resulting in generation of false signals for lower directional momentum, it is usually discouraged to be used in ranging markets.
Calculation of the MACD
Two EMAs (exponential moving averages) and a single line constitute a MACD.
The formula to calculate MACD is
MACD = EMA(12) – EMA(26)
Where, the numbers indicate the indicator’s period. Apart from it, you can calculate the corresponding histogram by the formula: -
Histogram = MACD – EMA(9).
While examining the formulae in order to understand the whole mechanism of MACD by drawing the charting software, it is really anticipated that you must know the behavior of the EMA and price action. No doubt, EMA is a quite sensitive moving average that depicts the trend of the latest price action in the market. The momentum of the corresponding price action may be identified by EMA and it also helps in defining the direction and power of the present pricing trend of the marketing pattern and hence, it is better than SMA. MACD helps us in giving the second dimension to our evaluation because it also compares the short term EMA with that of the longer term one. It should be understood that the market momentum is gathering and there is still a chance of feasibility position given the EMA(12) falls below or rises above the EMA(26).
Apart from these, histogram acts as the third dimension for evaluating the existing price trend. The much slower EMA(9) is compared with the MACD with the help of the control signal that may be measured in 9 hours, days or months. The resulting data can be used in the various ways by the traders.
In the histogram shown above, MACD is the red dotted line in the lower section constituting the histogram. The zero-line facilitates the fluctuation of the histogram. We also see the green line or the chart that fully depicts the highs and lows in market along with the extremities of MACD that provide us the bullish performance of the trading signal. Later on, the trend of lowering prices and higher MACD values helps in quick reversal of the price pattern in the market.
Histogram that shows the crossover pattern does not require to display signal line of EMA(9). There is no denying the fact that changing from positive to negative or the other way round clearly states that crossover has occurred.
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Trading with MACD
A number of ways are there to interpret and use the MACD for the various traders in the market nowadays.
1. MACD crossover
After the sign of the indicator value changes, MACD crossover occurs. In fact, when the MACD line crosses below or above the center line, it automatically is referred to the zero line in the chart. In order to create a bullish momentum change in the market, we have to get the above line at the zero level. Also, the second MACD line that crosses the signal line it results in the occurrence of the next crossover i.e. at EMA(9) as it has been discussed before. It must be kept in mind that the traders should opt for better management methods with conservative money or confirm them with the false signals that usually the crossover generates.
2. Divergence/convergence patterns
This sign is useful for the traders whose total calculation and analysis of the price trend of the market depends on MACD indicator. The above tool shows that the existing price trend is ought to go out of the stream. Also, the future reversal is independent of the price trend. It has been seen that depending on the pattern of divergence/convergence in context of the corresponding oscillator, reversal may occur in both the downtrend and uptrend.
Using any of the present trading software will offer you the best MACD. It may sometimes happen this tool for having any type of technical analysis that you may not be provided any vital information about any indicator. You may assemble some of the finest software tools like MetaTrader.
Emitting false signals from MACD is only due to the fact that EMAs visualize the trends at positions that should not exist. It is not much reliable because of its price sensitive nature and it may exhibit more errors than the typical indicator. You may see a lot of criticism about the reviews of this indicator on the various forums or websites but this does not conclude that the indicator is exponentially weak or it may not be implied for trading strategy. In fact, none of the present indicators is infallible. So, in order to make a long term profit, the traders should gather some vital knowledge about an indicator along with certain money management strategies. It is sure that the anticipation of good results is independent of the types of indicators.