MACD BASICS (Moving Average Convergence Divergence)

Construction of MACD

The MACD indicator displays three elements: the MACD line, the signal line, and the histogram. For example, taking the default parameter (12,26,9) then:

  • The MACD line (also known as the fast MACD line) is the average difference of the two MA12 and MA26 lines.
  • The signal line (or slow MACD) is the MA9 of the MACD.
  • Histogram is the difference between these two lines.

Traditional MACD Usage

MACD crossover – Crosses with the MACD . line

The first traditional use of the MACD is to use the crossovers between the two lines. Specifically, when the fast MACD line crosses below the slow MACD line, it signals the price to turn down and vice versa, it signals the possibility of the price turning up.

With this simple usage, the trader will face a lot of noise signals, and without signal filtering skills, the trader's trading results will be very bad.

The advice with this usage is that we must identify a clear trend, then wait for the signal and only enter the order according to the trend.

MACD divergence

Another popular application of the MACD is divergence signals, where the MACD acts as a leading indicator. Basically: a bullish divergence occurs when the price makes a new low (new low) but not on the MACD.

As in this example, the trader waits to buy when the bullish divergence has formed and the price breaks the red resistance line.

A bearish divergence occurs when the price makes a new high (new high) but not on the MACD.

When there is a bearish divergence signal, traders wait for the price to break the blue support line and enter.

Just like crossovers, divergences also have a lot of false signals. As in the example below, 4 consecutive bearish divergences can be observed, but the price is still going up because the uptrend is still very strong.