The Moving Average Convergence Divergence (MACD) is often used as a trend indicator, but it can also function as an oscillator.
The MACD allows for the determination of the future price direction, the potential strength of this movement, and trend reversals. This indicator helps to enter trading at the start of a trend and exit before its completion.
Understanding MACD Signals
The MACD includes three main indicators displayed under the price chart:
- Signal line
- MACD line
- Histogram
The histogram shows the difference between the MACD line and the signal line.
Moving Average Lines
The moving average that tracks the price of the underlying asset is called the MACD line.
The signal line is the moving average relative to the MACD indicator. It interacts with the MACD line to provide trading signals and smoothes its movement. You’ll learn how to interpret these signals next.
Histograms
Histograms show the difference between the MACD line and the signal line. This can be determined using bars located below and above the horizontal zero line, showing the strength of the price momentum.
This information will help identify times of momentum accumulation or loss.
Exceptions
On the MetaTrader 4 (MT4) trading platform, the default MACD indicator may vary. Often, it only displays the histogram and signal line, while the MACD line is not shown.
Using the MACD Indicator in Trading
A sell signal occurs when the MACD line crosses the signal line from above to below. The signal is reinforced if the bars on the histogram are located below the zero line.
If the MACD crosses the signal line from above to below, but the bars are still not below the zero line, the signal will be stronger. This signal is also a sell signal, but it is weaker.
Buy signals occur when the MACD crosses the signal line from below to above. If the histogram is above the zero line, the signal strength becomes stronger.
If the MACD line crosses the signal line from below to above, but the bars don’t cross above the zero line, this signal will also be a buy signal, but weaker.
Changing MACD Settings
The settings of 12, 26, and 9 are standard for MACD.
However, you can change these parameters to understand how quickly the indicator should react to price changes and how often it will provide trading signals.
Increasing Settings
Increased MACD settings will slow down the frequency of signals and make the receipt of inaccurate signals impossible. This will hinder the tracking of the start of individual potentially profitable trades.
Decreasing Settings
Lower MACD settings will make the indicator much more sensitive to price movement. This will lead to a large number of signals, many of which will be false.
If you wish to change MACD settings, you should know that the new data should improve trading results. Therefore, always check and compare profitable and loss-making trades. These trades are carried out with different MACD parameters according to a single trading strategy.