The Moving Average Convergence Divergence, MACD in short, is an indicator that helps to identify the trend and its strength, and the likelihood of the trend reversal. It has three components. The MACD line, the signal line, and the MACD histogram. In spoken language, it is pronounced as MAKDI, instead of spelling each letter separately.
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The first component: the MACD line
This line represents the distance between two Exponential Moving Averages, one with a period of 12 and the other 26. Whenever the MACD reaches the zero level, there is no difference between EMAs.
When the gap between two EMAs occurs, the MACD line runs away from the zero lines. The bigger the difference, the further the MACD line goes.
The second component: the signal line
This is nothing more like a smooth MACD. With default settings, it is calculated from the 9 previous periods’ average value.
The signal line is a slow version of the MACD line. It is a slow-motion moving average that is periodically intersected by the faster MACD.
The third component: the MACD histogram
The MACD histogram illustrates how far are the MACD and the signal lines from each other. When they cross, there are no visible bars. Otherwise, the bars are getting longer when the MACD line and its average (the signal line) increase the distance between them. The other thing is that the bars change polarity. There will form above the zero levels when the price is going up, and they will form below zero when the price falls.
The configuration of the MACD indicator
To set the MACD indicator-up you have to click on the indicators feature and scroll the list down. The MACD will be among oscillators. By clicking the pen icon in the indicator’s window you can adjust its settings. You can modify the color and the thickness of all three oscillator components. Moreover, there is a setting to change the period of the MACD line and the signal line.
Pros and Cons
Here are the advantages and disadvantages of the Moving Average Convergence Divergence (MACD) indicator:
- 👍 Pros:
- Helps identify trends and trend strength
- Provides signals for potential trend reversals
- Can be used in combination with other indicators for enhanced analysis
- 👎 Cons:
- May produce false signals in ranging or choppy markets
- Requires understanding of how to interpret and use the indicator effectively
- Should not be relied upon as the sole basis for trading decisions
The general interpretation
The basic rule is to observe two lines of the indicator and the points where they cross each other. When the signal line cuts the MACD line on the way up, it suggests the prices will increase. In the opposite situation, when the signal line cuts the MACD line on the way down, you can expect the prices to fall.
This is the general interpretation of the MACD indicator. It is simple, yet efficient. And this is its greatest advantage. You may be also interested in reading the guide about strategy which combines MACD, EMA, and Parabolic SAR.
I recommend trading with the MACD on the free Olymp Trade practice account. Once you get hold of it and feel like you can take the risk, you can move to the real account.
Do not hesitate to share your experience with us. You will find the comments section below.
Wish you good luck!
Q&A on the MACD Indicator
- Q: What are the components of the MACD indicator?
- A: The MACD indicator consists of the MACD line, signal line, and MACD histogram.
- Q: How do I interpret the MACD line?
- A: The MACD line represents the difference between two Exponential Moving Averages (EMAs) and helps identify trends.
- Q: What is the signal line?
- A: The signal line is a smoothed version of the MACD line and provides additional buy/sell signals.
- Q: What does the MACD histogram indicate?
- A: The MACD histogram shows the distance between the MACD line and signal line, indicating trend strength and potential crossovers.
- Q: How can I customize the MACD indicator?
- A: You can adjust the settings of the MACD indicator, such as changing the period and color, through the platform’s indicators feature.
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