Updated: Apr 22
Do you know what MACD is? If yes, then great! If not, then don’t worry because here you will not only know about the MACD Technical Indicator but also about the top 5 trading strategies using MACD technical indicator.
So without any further ado, let’s get started.
What exactly is MACD?
Moving Average Convergence Divergence (MACD) is well-known for its significance as an indicator. When it comes to detecting various possibilities throughout the financial markets, you may be stunned to discover that this incredible technical indicator not only helps us identify whether the pattern is bullish or bearish, it additionally benefits us in our trading by providing entry and exit points for the market.
Therefore, in today's post, we'll look at five trading techniques that make use of the indicator.
In addition, we will go over how to integrate such approaches into your trading platform.
What is Moving Average Convergence Divergence?
Looking at the definition of MACD, we can conclude that it is one of the most commonly used technical analysis indicators.
It more closely resembles a trend following a momentum indicator. It essentially means that it monitors an asset's momentum to determine whether it is moving upwards or downwards.
The Moving Average Convergence Divergence indicator is displayed in a distinct box below the Moving Average Convergence Divergence indicator chart. It looks like a spectrum with an additional line.
As one drifts farther from another, the graphic bars become longer. As the trend lines move near the lines become smaller.
Fast fluctuations will appear as lengthy bars in the MACD histogram, while flat moves will appear as shorter bars.
The indicator's preset settings are 12, 26, and 9. It should be noted, though, that several investors misinterpret the indicator's two bars as simple moving averages.
Keep in mind that the bars are exponentially shifting trends and respond more sharply to the latest price change than normal moving averages (SMA).
Thus, the MACD lines are represented as 12-period EMA and 26-period EMA.
After you've mastered the principles of such technical trend indicators, you should think about some of the best investment techniques. So, what exactly are those incredible investment strategies? Let us know.
The top five trading strategies
So let's get started with our first method, histogram reversals. We are all aware that the histogram is one of the most useful components of our MACD. It features bars that portray one of the most incredible things. It's the distinction between signal lines and MACD.
Whenever the current value is rising fast in one direction, the histogram expands in height, so when the histogram contracts, the stock moves slowly.
This indicates that as the bars travel away from the origin, the 2 moving average lines separate. Following the first growth stage is completed, a hump form will most likely appear; this is an indication that the moving averages are compressing again, which can be an early indication of a crossing.
In contrast to the preceding trailing crossover approach, it is a leading strategy. The histogram reversal technique is built on the use of established patterns as the foundation for putting trades. This means that the approach can be used before the market action occurs.
The technique can also be used to exit a trade, with holdings terminated whenever the MACD begins to revert in the other manner.
2. The MACD and Money Flow Index
Now we'll look at another of the top trading methods that makes use of the MACD technical indicator.
It's essentially the money flow index. Its primary duty is to concentrate not just on price but also on volume. The reason for this focus is straightforward.
It is due to the fact that there is a price change as well as volume spikes are required to generate high readings. Also, when compared to other oscillators of this type, it produces fewer waves and sells signals.
This strategy does an amazing thing: it combines the MACD stock indicator crossing with the overbought or oversold signals of the Money Flow Index.
Here are some of the important points to note-
● Whenever the MFI indicates that a market is overvalued, we look for a bearish cross of the MACD indicators.
● If this happens, we'll have no choice but to cut it short.
● It also changes the direction.
● An oversold MFI score and a bullish crossing of the MACD indicators produce a long signal.
● As an outcome, we continue till the MACD signal line crosses the trigger point in the other direction.
3. Crossovers Here's another fantastic approach from the top trading systems that employ the MACD technical indicator. Both the MACD and the signal can be used in the same way as a stochastic oscillator.
There is also a crossover between these lines, which allows them to provide signals such as Buy and sell.
A buy indication is generated whenever the shortened, greater responsive line – the MACD line – As is the case with most crossover techniques, the signal line passes above the slower line.
Whenever the MACD line crosses below the trigger line, it indicates a bearish sell sign.
Because the crossover approach is fundamentally trailing, it is predicated on waiting for a shift.
This happens prior to establishing a trade.
The MACD's major drawback with weaker market moves would be that the price may already have hit a reversal level by the time a signal is produced. This is alluded to as a "false signal."
It's important to note that valuation action-based signal verification procedures are usually regarded as more reliable.
4. Zero crosses
So now we have come to our next strategy in which we are going to reveal what Zero crosses. Here you go-
● Buy when MACD crosses above the zero line.
● If MACD passes below the zero line, sell
This method should be used with caution, as the delayed feature ensures that warning signals are frequently supplied too late in fast, choppy markets. On the other hand, this can be quite useful as a strategy for conveying reversal signs of long sweeping movements.
5. MACD and Relative Vigor Index
So here comes our last, but not the least, trading strategy. The Relative Vigor Index is an indicator that analyses the stock's closing price in relation to its market band.
The analysis is a bit challenging. To put it differently, consider the RVI to be a distant relative of the Stochastic Oscillator.
By introducing an indicator, it's indeed feasible to have more information about overvalued conditions.
This sets the stage for the MACD stock signal, which confirms if the trend's velocity or power is maintained.
The main purpose of using these two technologies is to match crossings.
In simple terms, if one of the signals crosses, we await for the other to cross in the same manner. Whenever this occurs, we have two options: buy it or sell it.
When is the most appropriate time to use MACD?
When using MACD, no specific timing is required. It is entirely dependent on one's personal preferences and trading strategy.
Some people may believe that there is no right moment to use the MACD indicator because they either do not use an analytical method to research or prefer to use a number of other signals to predict price activity.
So it's time to wrap things up. The five best trading methods using the MACD technical indicator are listed above. Indicators and strategies can be perplexing when first beginning out as a trader. But, when we acquire the needed details and skills, they might be excellent tools to augment our trade. We believe you will find this post interesting and that you will put it to good use in your practical life. Don't forget to share this fantastic blog with your friends and family.