Moving average convergence divergence (MACD) indicator is a well-known indicator, but its usage is difficult, so it is relatively picky. MACD Histogram is classified as momentum and trend-driven indicator, so if you know how to use it, it will be a very good signal filtering tool. In today's article, we do not mention anything complicated, just review how to use MACD properly.

STRUCTURE OF MACD

The MACD line is the core component of this indicator, it is calculated from the difference of 2 EMAs with periods of 26 and 12 respectively (default).

The signal line is the average line of the MACD line with a default parameter of 9.

MACD histogram is the difference between the MACD line and the signal line.


MANUAL MACD HISTOGRAM Correctly

Since the MACD is based on an MA, we can then use the MACD for momentum analysis, find trend entry points, and stay in there until we see momentum decline. Here's how to use it in detail:

1. The MACD line cuts the reference level 0

In the chart below, adding two MA lines including EMA12 and EMA26 on the price chart, now observe the intersection of these two MA lines with the movement of the MACD line below.


When the EMA12 cut below the EMA26 (the downtrend formed), the MACD line cut below the zero levels.

Conversely, when EMA12 crosses above EMA26, MACD also cuts above zero.
Take advantage of this, every time MA crosses the zero level, pay attention to the possibility that a new up/downtrend will form.

2. Line signal

As for the signal line, you will observe how it moves with the MACD line. Basically, when they stretch apart, the trend is getting stronger, on the contrary, when they gather together, the up / down momentum is losing strength.

However, for a strong trend, this may not be accurate. A crossover between them can occur while the trend is on, as in zone 3 of the example below don't be confused by their crossover.


3. Entry points in the trend

If merely entering orders based on the MACCD, the level of effect can be terrible, so we need to incorporate more price action for this.

The chart below is divided into 6 regions, including:
  • Cumulative area: (1), (3)
  • Trend zone: (2), (4), (6)
  • Divergence Zones: (5)

The buying zones are at the end of zones (1) and (3) as the MACD has broken above the zero lines, and especially the price breaks the resistance of the pattern.

Area (5) is the area to exit the buy order when the price supports the support, and at the same time, there is a divergence signal from the MACD.

Divergence signals such as zone (5) if you know how to utilize traders can enter orders from the beginning of the trend, and of course, if you take advantage of the divergence signals, the profit margin will be very large.