5 useful tips for using the MACD indicator in technical analysis

How to Use the MACD Indicator

The moving average lines originally were designed to work on hourly charts. It is believed that the best results can be obtained on charts from H1 and higher. By default, when the columns are in the positive zone, they are colored green, and when in the negative value zone, they are colored red.

  • First, notice that we are using closing prices to identify the divergence.
  • This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
  • For these traders, this aspect of MACD might be viewed as a leading indicator of future trend changes.
  • When the histogram moves above the zero line the price has entered a bullish trend, and when the histogram moves below zero the price has entered a bearish trend.

Here we cover three of the most common, divergence, crossovers and zero line crossovers, and provide examples of all three. It’s common knowledge that the market always returns to the mean and the fast MA always returns to the slow one. The MACD https://www.bigshotrading.info/blog/trading-the-london-session/ pulled back all the way to the 0-line during the consolidation. The breakout of the MACD lines and the price action led to the next trending phase. The screenshot below shows the MACD line and the Signal line at the bottom of the chart.

The Complete Guide to MACD Indicator

To see signals and potentially make trades, it’s important to understand how to use the MACD indicator. A momentum indicator is used to give you an idea of how overbought or oversold a market condition exactly is. The free app is not only a great portfolio manager, it also provides you with professional charts and indicators for every crypto market you can imagine. Soon after, the price structure of this market started making lower lows (labelled LL) and lower highs (labelled LH), an indication that a bearish trend has started.

How to Use the MACD Indicator

Positive values increase as the shorter EMA diverges further from the longer EMA. Negative MACD values indicate that the 12-day EMA is below the 26-day EMA. Negative values increase as the shorter EMA diverges further below the longer EMA. The Moving Average Convergence Divergence (MACD) is an oscillator type indicator that is widely used by traders for technical analysis.

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The RSI is an oscillator that calculates average price gains and losses over a given period of time. The default time period is 14 periods with values bounded from 0 to 100. A reading above 70 suggests an overbought condition, while a reading below 30 is considered oversold, with both potentially signaling a top is forming, or vice versa (a bottom is forming). When a cryptocurrency’s price is moving in one direction, but the MACD line is moving in another, it’s known as a divergence.

  • We explore what the MACD indicator looks like on an example chart and how you can read it to gain trading insights.
  • Below we see Gamestop (GME) with a large bearish divergence from August to October.
  • Some traders might utilize this divergence in tandem with chart patterns like rising and falling wedges.
  • The MACD is one of the most potent technical tools in the arsenal of many traders.
  • This unique blend of trend and momentum can be applied to daily, weekly or monthly charts.

This can be done to avoid a profitable position potentially turning into a loss. At the final high (point E), price reversed lower and was soon followed by a bearish MACD crossover signal – from where a new downtrend started. Soon after point D, the signal line crossed above the MACD line again, signalling the first true trend continuation signal, which offered another opportunity for traders to join the uptrend. Then, in the window that opens, pay attention to the menu in the upper left corner. Select the item “Technical indicators”, then “MACD” and change the default settings with your own parameters in the window on the right.

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On the price chart, notice how broken support turned into resistance on the throwback bounce in November (red dotted line). A bullish centerline crossover occurs when the MACD line moves above the zero line to turn positive. This happens when the 12-day EMA of the underlying security moves above the 26-day EMA. A bearish centerline crossover occurs when the MACD moves below the zero line to turn negative.

Moreover, this indicator might signal a potential reversal, but it doesn’t tell traders when that reversal may happen. Investors should remember the MACD only signals possible reversals, not guaranteed forecasts. Traders can use the MACD line to identify potential trends, but the MACD line can provide even more information after applying the signal line. A signal line is the 9-day EMA of the MACD line, which is then plotted on top of the MACD line on the histogram. When the 12-day EMA crosses over the 26-day EMA, the MACD generates a potential buy signal and vice versa.

When the shorter-term 12-period exponential moving average (EMA) crosses over the longer-term 26-period EMA a potential buy signal is generated. Therefore, to mitigate risk and confirm the signals further, traders should use How to Use the MACD Indicator the MACD in tandem with additional indicators, such as the RSI indicator. One reason traders frequently lose with this setup is that they enter a position on a signal from the MACD but exit it based on the movement in price.

It reveals the current momentum of a cryptocurrency, including its direction and strength. In short, the MACD indicator gives the short to medium term trend of the price action. A positive MACD value indicates upward price trend while a negative MACD value indicates a downward price trend.

Divergence occurs when the moving averages move away from each other. The shorter moving average (12-day) is faster and responsible for most MACD movements. The longer moving average (26-day) is slower and less reactive to price changes in the underlying security. There is, however, a good reason why the MACD indicator is still favoured by many experienced traders. Furthermore, noticing the momentum divergence on the MACD Histogram can help you avoid a profitable position potentially turning into a loss.

How to Use the MACD Indicator

The Moving Average Convergence Divergence (MACD) has been used in traditional finance markets for close to fifty years. Now, cryptocurrency traders are using it to spot trend changes and grow their profits. As cryptocurrency is a very volatile market, the momentum indicator can be especially useful, helping traders trade smarter as they gain an insight into short-term market moves. Johnson & Johnson with a 12-day
and a 26-day

exponential moving average (EMA)
plotted on the price chart. The MACD indicator is primarily used to trade trends and should not be used
in a ranging market.