Best MACD Indicator Strategies To Learn

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Best MACD Indicator Strategies:

  • 1

    Strategy 1 – The Crossover Strategy

  • 2

    Strategy 2 – The Histogram Reversal Strategy

  • 3

    Strategy 3 – The Zero Crosses Strategy

  • 4

    Strategy 4 – The Divergence Trading Strategy

The MACD indicator helps traders generate signals from moving averages but how does it actually work? In this article we’ll explain everything you need to know about trading with MACD and provide you with some of the most successful trading strategies that can help strengthen your trading system.

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What is a MACD Indicator?

MACD stands for Moving Average Convergence Divergence. The MACD indicator is a technical trading indicator invented in 1979 by Gerald Appel and is used for tracking trends and momentum over time. The MACD indicator displays the relationship between moving averages on stock prices and the MACD line can be used and interpreted in multiple ways (more on this in a bit), including an analysis of rise and fall, crossovers, and divergences. The MACD indicator appears on a chart as two oscillating lines. Trading signals can be identified when these two lines cross over.

How does MACD Work?

MACD works by calculating the difference between exponential moving averages (EMAs). MACD is the difference between a tradable asset’s long- term exponential moving average (16-day EMA) and short-term EMA (12-day EMA). An additional nine-day EMA is also plotted on the MACD chart and signals are issued when the MACD moves above or below this value.

MACD is represented visually on a histogram that shows the difference between MACD and the nine-day EMA we just talked about. The histogram responds to the momentum (or speed) of price fluctuations, allowing traders to assess the strength of an asset’s price fluctuation.

For example, when the MACD appears above the nine-day EMA it is considered positive and when it appears below the nine-day EMA it is considered negative. Likewise, as price movement gains momentum, the histogram expands and when price movement slows the histogram shrinks.

MACD Pros and Cons

There are both pros and cons to using MACD. On the one hand, MACD can be used successfully to identify trends, momentum, and issue traders with buy and sell signals. Another great asset is that MACD can be enhanced by using it alongside other trading signals (more on this in just a bit).

But there are some distinct issues associated with MACD too. Results must be assessed carefully. MACD can be easily misread. For example, MACD divergence and reversal signals are not always an accurate predictor of market reversal.

How to Read MACD Signals

There are many MACD signals that can be read into to determine market trends. Traders interpret MACD in a few different ways. Principally, MACD is read in terms of buying/selling, and market trending (up-trending or down-trending), bullish/bearish, and convergence/ divergence.

Let’s take a look at each of these in more detail below.

Overbought/ oversold

When MACD peaks it indicates that a tradeable asset is in overbought status. When MACD troughs it indicates that the tradeable asset is oversold. This gives traders an indication of when the price of a tradable asset might be due to increase and/or decrease.

Overbought/oversold

Overbought/oversold

Uptrend/downtrend

When the MACD falls above the zero line it indicates that the price of a tradeable asset is increasing (in an uptrend). When the MACD falls below the zero line, it indicates that the price is decreasing (in a downtrend). This information allows traders to assess the health of the market and buy at optimum times, according to their particular trading strategy.

For example, traders employing a trend following strategy would want to buy when MACD is experiencing an uptrend. Traders employing a mean revision strategy would sell at this time.

Uptrend/ downtrend

Uptrend/ downtrend

Bullish/bearish

When MACD crosses above zero it is generally termed bullish. In trading terms, bullish just refers to an optimistic stock price outlook. When MACD crosses below zero, it is generally considered to be bearish. Bearish is the opposite of bullish. This term refers to a pessimistic stock price outlook (aka a predicted stick price drop).

Convergence/divergence

When a MACD histogram shrinks in height it indicates convergence. This means that the futures price and the cash price of the tradable asset are moving closer together over time. Oftentimes this occurs as the result of a slowdown.

On the opposite end of the spectrum, when a MACD histogram expands this indicates a divergence. The MACD is accelerating towards the market trend. This indicates that current price trends are starting to weaken and could signal that those prices will shortly change direction.

Convergence/divergence

Convergence/divergence

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Top 4 MACD Strategies to learn

There are many ways to employ MACD, but most traders will adopt one of the following four, core strategies. These are (a) the crossover strategy (b) the histogram reversal strategy (c) the zero crosses strategy, and (d) the divergence trading strategy.

Strategy 1 – The Crossover Strategy

The crossover strategy uses the crossover between a MACD line and a signal line to determine buying and selling signals. A buying signal is realised when the MACD line crosses above the signal line. A sell signal is realised when the MACD line crosses below the signal line. When using the crossover strategy, it is important to be aware that when market trends are weak, prices might already reach a point of reversal by the time a signal has been generated, resulting in a false signal.

Crossover strategy

Crossover strategy

Strategy 2 – The Histogram Reversal Strategy

The histogram reversal strategy is a very popular strategy used by traders. This strategy takes existing trends then places positions based on those trends. The bars on a histogram represent the difference between the MACD and signal line.

When the histogram bars shrink, it indicates that the market price is moving slowly. When the bars increase in height it indicates that market price is moving in a particular direction more strongly. Traders employ this strategy to make more profitable trades and mitigate losing trades.

Strategy 3 – The Zero Crosses Strategy

The zero crosses strategy looks at when EMAs cross the zero line to determine the emergence of new uptrends and downtrends. When the MACD crosses the zero line from below it indicates the emergence of an uptrend. When the MACD crosses the zero line from above it indicates the emergence of a downtrend.

Traders use this strategy to buy and close positions at the optimum times. For example, the aim is to buy a short position then the MACD crosses above the zero line and sell a long position when the MACD crosses below the zero line.

Zero Crosses Strategy

Zero Crosses Strategy

Strategy 4 – The Divergence Trading Strategy

Divergence trading is a very common trading strategy used most commonly for forex trading. Divergence trading looks at when the price of an asset is moving in the opposite direction of the indicator and takes this signal as an indication that price trends are weakening or heading towards a change in direction. Because of this, the strategy is often used as a way for traders to determine if a trend is getting weaker and heading towards trend reversal.

There are two principal types of divergence.

1

Bullish divergence – the price moves lower as the indicator points up

Bullish divergence

Bullish divergence

2

Bearish divergence – the price moves higher as the indicator points down

Bearish divergence

Bearish divergence

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How to Combine MACD with Other Signals

Although useful if used appropriately, the MACD does have some significant drawbacks. One of the biggest issues that traders face when using MACD is lag. With MACD you often get the indicator signal too late – after the price may have already changed direction. Because of issues like this, it is often better to use MACD in combination with other indicators.

1 – MACD + Relative Vigor Index

MACD can be used in combination with a Relative Vigor Index to provide more information about overbought and oversold assets. By using this indicator with MACD traders get a more accurate picture of the momentum and strength of a trend. Traders use these indicators in tandem to cross-reference crossovers. Only once both indicators show a crossover will equity be bought or sold.

2 – MACD + Money Flow Index

MACD can also be used in tandem with Money Flow Index (or MFI). Money Flow Index is an oscillator signal that takes into account volume and price to produce overbought/oversold signals. Traders using this strategy will wait for the MFI to issue a signal for overbought stock at the same time as a bearish MACD, to go short (or vice versa to go long).

3 – MACD + TEMA

MACD is sometimes used in combination with the Triple Exponential Moving Average indicator (or TEMA). TEMA indicators take into account three exponential moving averages at once. When contrary signals are received from these two indicators it is a sign for traders to exit their plosions.

4 – MACD + TRIX indicator

Finally, MACD can also be used alongside a TRIX indicator. TRIX is a momentum oscillator. Traders using this strategy will wait for the crossovers of a moving average with the moment when the TRIX indicator crosses the zero line to enter the market.

Top 3 Tips for Using MACD More Effectively

Using MACD takes some getting used to but there are some strategies that can be employed to boost performance when using this popular trading indicator.

1. Follow these basic rules

If you’re new to using MACD, try to start by following these simple guidelines. Using the MACD crossover method is a great place to start. In general, that means taking long MACD signals when prices rise above a 200 period-moving average, buying when MACD crosses the zero line, and selling when the MACD crosses below the zero line.

2. Use MACD in combination with other indicators

As we’ve mentioned, MACD isn’t always 100% accurate and can sometimes produce false signals. To overcome this, try to use MACD in tandem with other indicators.

3. Identify the best MACD settings for day trading

For regular day trading MACD is best employed using the default time settings of 12, 16, and 9 periods.

Types of MACD Indicator Strategies

The MACD indicator is popular among traders for analyzing price momentum and identifying potential trading opportunities. The following are the best MACD strategies to learn.

Histogram: The histogram is a visual representation of the difference between the signal and MACD lines. As a trader, you can use the histogram to pinpoint potential changes in momentum. When the histogram bars rise, they indicate an increase in bullish momentum. When the bars fall, they suggest an increase in bearish momentum. To predict trend reversals, you can look for divergences between the price and the histogram.

Crossover Strategy: The crossover strategy is among the most common MACD strategies. It comprises two major components: the signal line and the MACD line. Assuming the MACD line rises above the signal line, it creates a bullish signal. This signal suggests that it is an opportunity to buy. On the other hand, assuming that the MACD line falls below the signal line, it creates a bearish signal. This signal indicates an opportunity to sell.

Zero-Cross Strategy: The zero-cross strategy is another major approach to trading using MACD. Using this strategy, you can focus on the MACD line crossing below or above the zero line (centerline). Assuming the MACD line rises above zero, it shows a bullish trend. When it falls below zero, it shows a bearish trend. You can use this crossover as a signal to enter or exit trades.

Divergence Strategy: Divergence is a powerful MACD strategy. You can use it to identify discrepancies by comparing the price chart with the MACD indicator. Bullish divergence takes place when the price creates lower lows while the MACD indicator creates higher lows. This trend indicates a potential bullish reversal. Conversely, bearish divergence takes place when the price creates higher highs while the MACD indicator creates lower highs. This trend suggests a potential bearish reversal.

MACD-Histogram Strategy: Aside from the traditional histogram, you can also use the MACD histogram as a standalone strategy. When the histogram bars change direction, they signal momentum shifts. For instance, a change from positive to negative bars indicates a shift from bullish to bearish momentum and vice versa.

MACD Indicator for Day Trading

Time and again, day traders find the MACD indicator practical due to its capacity to deliver quick signals for short-term trading. The MACD indicator can help you establish trends and potential entry and exit points. You can use the crossover and zero-cross strategies to identify rapid signals. You can also use shorter timeframes, including 10-minute or 1-hour charts, to make quick decisions according to MACD signals.

MACD Limitations

While the MACD indicator is a valuable tool for traders, it has various limitations you should know. These include:

1

Market Choppiness: Crossover signals can lead to whipsaws. Such a situation involves a quick price reversal after a signal is created. It can lead to false signals and trading losses.

2

Lagging Indicator: The MACD signals depend on moving averages and may lag behind the current price. As a result, the indicator can fail to provide signals at the initial point of a trend or reversal, causing traders to miss out on opportunities.

3

It is Not a Standalone Indicator: The MACD is most efficient when used alongside other indicators and technical analysis tools to reduce false alarms and to confirm signals.

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Summary

MACD stands for Moving Average Convergence Divergence and is a technical indicator used in trading to track trends and momentum over time. There are many different strategies that can be employed when using MACD and MACD can be used in combination with other signals to produce more accurate results.

FAQs

When should I use MACD?

MACD can be used within any given time frame. Optimum time frames vary depending on the type of trade being executed.

Is MACD a Leading or a Lagging Indicator?

MACD is a lagging indicator, meaning that it is based on historic stock price action and data.

Is MACD reliable?

MACD is not 100% reliable and come sometimes produce false signals, especially in sideways markets.

What are the two lines on MACD?

The MACD line indicates the difference between two moving averages. The EMA line is the moving average.

Team that worked on the article

Ivan Andriyenko
Author at Traders Union

Ivan Andriyenko is a financial expert and analyst. He specializes in trading in the Forex, stock and cryptocurrency markets. His preferred trading style is conservative strategies with low or medium risk, medium and long-term investments. He has 7 years of experience in the financial markets. Ivan is involved in preparation of articles for novice traders, and also of the reviews and evaluation of brokers, analyzing their reliability, trading conditions and peculiarities.

Ivan continuously tests new strategies for various assets, choosing the most effective options. In addition, he believes that helping novice traders is an important aspect of work. He shares information that beginners require – educational materials, strategies.

Ivan’s motto: continuous studying and experimentation lead to success.

Dr. BJ Johnson
Dr. BJ Johnson
Developmental English Editor

Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.

The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.

Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.

Mirjan Hipolito
Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.