The MACD is simply an indicator of the difference between a fast and a slow moving average. As shown in the chart below:


It can be seen that, when the two moving averages are separated, the price will move stronger and vice versa. The picture below is an enlarged view of the indicator:


When the moving averages diverge we call them divergence. And vice versa, they move together, we call it convergence. It is also the origin of the name "MACD -Moving Average Convergence Divergence".

A little more information for this indicator is:
  • In the 1970s, Gerald Appel created the MACD line.
  • In 1986, Thomas Aspray added a histogram to this indicator.
There are 3 ways to interpret the MACD indicator:

  • Crossover: As the chart above, when the MACD crosses below the signal line, it is a bearish signal. On the contrary, when the MACD crosses above the signal line, it shows a bullish signal.
  • Divergence: When the Price Divergence with the MACD. It signals the end of the current trend.
  • Strong increase: When the MACD rises suddenly, the 2 moving averages diverge away from each other, which is a signal that the price of the asset is overbought or oversold and will soon return to normal...
The default settings for the MACD indicator are:
  • Slow-moving average: 26 EMA
  • Fast-moving average: 12 EMA
  • Signal line: EMA 9 of the difference between fast and slow lines
As shown below:




WHEN NOT TO USE MACD

MACD should be used in trending markets. If the market is flat, we should not use it because the MACD will give a lot of noise.

The MACD is quite useful for the swing traders because when trading in the trend, the signal the MACD provides is reliable.


COMBINE MACD WITH ANOTHER INDICATOR

MACD should not be used independently, but in combination with other technical indicators for more confirmation and confirmation signals. For example, RSI, Fibonacci, Bollinger Bands, Stochastic, ...


HOW TO TRADE WITH MACD

When a new trend forms, the fast-moving average will react first and cross the slower line. When this crossover occurs, the fast line starts to "diverge" or move away from the slow line, which signals that a new trend has formed. As shown below:


Note, the moment of intersection, on the histogram will also temporarily disappear. When the 2 lines are separated, it shows a strong moving trend.

H4 framework DAX chart


  • When the MACD intersects with the zero lines from above, it will be a bearish signal. And vice versa.
  • This crossover provides the trader with a signal of a trend change but does not have a clear assessment of momentum as when the MACD crosses the signal line.
  • As we can see, a divergence occurs when the moving averages are separated, showing strong bullish momentum.

The photo below shows the bullish divergence on MACD:


“Positive Divergence” or “Bullish Divergence” occurs when the price lows lower, but the MACD creates a higher low. As shown above.

The photo below shows the bearish divergence on MACD:


"Negative Divergence" or "Bearish Divergence" occurs when the price makes a higher high but the MACD makes a lower high. As shown above.

Divergence to the price can occur above the MACD or MACD histogram.


CONCLUSION

The MACD indicator is a very popular technical indicator in technical analysis, as it provides traders with the ability to quickly identify short-term trends. And quantify the momentum of the trend.

The clear trading signals help to minimize the subjective factor when participating in trading. However, we should not use MACD alone when trading but should be combined with other trading techniques or in combination with other technical indicators.