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MACD – How To Use The MACD Correctly

The MACD is a momentum and trend-following indicator that is based on the information of moving averages and, thus, ideal to act as an additional momentum tool and momentum filter for your trading. In this article, we will explain what the MACD does, how it helps you analyze price and how to use it in your own trading.

First, let’s take a look at the individual components of the MACD indicator:

MACD Line: The MACD line is the heart of the indicator and it’s the difference between the 12-period EMA and the 26 period EMA. This means that the MACD line is basically a complete moving average crossover system in just one line.

Signal Line: The Signal line is the 9-period EMA of MACD Line

MACD Histogram: MACD Line – Signal Line

In this article, we focus on the MACD and the signal line in particular. The histogram is derived from the other two components of the MACD and, thus, don’t add as much explanatory value to overall MACD trading.

 

The basics of the MACD indicator

Since the MACD is based on moving averages, it’s ideal for analyzing momentum in price, finding trend-following entries and staying in trends until momentum is dying off.

There are 2 MACD signals in particular that we will explore in this article and explain step by step how to use the MACD to find trades:

 

1) The MACD Line cross 0

In the screenshot below, the MACD line is the red line and it’s based on the 12 and the 26 moving averages. You can also see that I plotted the two moving averages on the chart and when the two MAs cross, the MACD line crosses 0. As I said earlier, the MACD line is similar to a moving average crossover system and the 0 line cross shows that nicely.

signal_line

As we know from our moving averages article, a cross of 2 MAs shows a change in momentum and often foreshadows the creation of a new trend. So, whenever the MACD Line crosses 0, it shows that momentum is changing and potentially a new trend is just being created.

 

1) The Signal Line

When you see the two MACD indicator lines move away from each other, it means that momentum is increasing and the trend is getting stronger. When the two lines are coming closer to each other, it shows that price is losing strength.

However, the MACD is an oscillator and during very strong trends, it won’t give very accurate information. Thus, when you are in a strong trend, don’t get confused by too many crossings of the MACD lines.

TIP: As long as the MACD lines are above 0 and price is above the 12 and 26 EMAs, the trend is still going on. In the video below, I show this concept in more detail.

 

Trend- following entry | scenario 1

During ranges, the two lines from your MACD are very close together and they hover around 0; this means that there is no momentum and no strength.

When price breaks out and starts a trend, the two indicator lines pull away from the 0 line and also move away from each other. Then, during a trend, the moving averages can act as support and resistance and keep you in trends. When the price crosses below the EMAS the uptrend is over.

The same holds true for downtrends. At the beginning, or during a downtrend, the two indicator lines are pointing down and also show a lot of space between the lines. This shows strong downside momentum. A downtrend comes to an end when price crosses above the moving averages.

cross_MA

 

MACD trade entry | Example 2

The screenshot below shows another classic example how the MACD adds context to price movements. After the trendline break and when price broke the moving averages to the downside, a new downtrend was started. The MACD then also broke the 0 line and the two indicator lines moved away from each other as the downtrend gained momentum. At the bottom of the downtrend, the MACD showed a divergence, foreshadowing the loss in momentum and the end of the trend.

entry_ride_exit

 

MACD divergences as early entries

MACD divergences are another great way to analyze price and find early trades. You can see in the screenshot below how price was moving higher very slowly over a long period of time. At the same time, the MACD moved lower showing that there was no buying strength behind the slow grind. Then, suddenly, price broke below the two moving averages quickly and also the MACD lines crossed below 0 giving a short entry. During the following sell-off, the MACD stayed below 0 and it allowed traders to ride the trend until the very bottom.

Divergence

MACD vs RSI – which momentum indicator should you pick?

Traders always ask me whether they should use the MACD or the RSI in their trading!? And although the two indicators are very similar and I prefer the RSI in my own trading, I often suggest using the MACD in the beginning.

The MACD has two major advantages over the RSI which can help new traders make better decisions. First, the two lines of the MACD provide more information and, thus, are often easier to read for new traders. Secondly, the 0 line cross is a very objective signal and there is little room for interpretation.

Thus, if you are a new trader, looking for a good momentum indicator, I suggest going with the MACD.

RSI_vs_MACD

 

Overall, as with most indicators, you probably don’t need it as you can read momentum information directly from your chart. HOWEVER, never let anyone tell you that indicators don’t work. They do! It just comes down to how you use them.

Indicators are great trading tools which offer objective and easily to interpret information. In the case of the MACD, the indicator is ideal when it comes to analyzing momentum and also finding new trends.

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About Rolf

33 comments

  1. Hi Rolf!

    Thanks for your very informative post on MACD. Haven’t quite liked it neither used it coz of not knowing how to use it but il try your application.

    Can settings of 8ema[fast] , 21/34ema [slow] and 9sma work when using macd?

    your response is appreciated

    • Hello Jasper,

      yes, if you are a day trader, you can definitely use the faster settings. If you are more longer term, the 21/34 should work well. There is no right or wrong. It comes down to the application.

      Rolf

  2. You have left out the MOST important component of the MACD indicator. This shows that you do not actually know this indicator or how to use it as claimed.

  3. Hey rolf,

    Just wanna let you know that you guys are doing a great job with your website and i am so glad that i’ve found it 🙂

    One day i am going to quit my corporate job and live this dream.

  4. Hi sir,
    This is very informative articles specially on newbie like me and has a day job. So precise to decide when to make an entry…thank you so much..

  5. MACD – RSI BEAUTIFUL CLARITY

  6. What timeframe should be used? Can I use five minute candles?

  7. How to detect the false divergences and how to findout the legitimate ones. Because most of the times, we find divergences and expect reversals, but it keeps on going in the same direction with same divergence. So how o avoid fake divergences and detect the legitimate divergences. say in your above post “MACD divergences as early entries”, price made bearish divergence with MACD but it kept on going in the same direction with same bearish divergence and finally it made the reversal. but there are atleast 2 fake bearish divergence signs in that divergence. Can you shed some light on how to go findout the legitimate ones? Thanks

  8. Great info bro! Hope can learn as much as possible here to recover my losses =( Thx for sharing

  9. Hi Rolf,

    Often times daily and 4h timeframes indicate quite opposite things, e.g. daily may show oversold while 4h shows overbought. Which timeframe in this case we should rely on more? The higher one? Thank you.

    • Hello Rustam,

      that also depends a lot on your strategy. For my part, I don’t look at indicators from the higher timeframe. On the higher TF, I just want to get the direction, important key levels and price action confirmation.

      Rolf

  10. Great Information Wolf… do you ever consider using the MACD in conjunction with the RSI? if so, how would you approach it? I am a newbie, I am just trying to if and how some of these indicators can complement eachother… thanks for anything you can add… again, great article.

  11. Hi there, are you saying if the macd line is below the 0.000 you bid down and vise versa??

  12. Thanks a lot for your insights. This helps a ton. My understanding is either to follow Indicators/Price Action.

    If so, how to decide which indicator is to be used?

  13. just to clarify, when the macd line is above 0.000 and the ema’s are below candles which is pushing the candles up theres a possibility to bid high and when the macd lines is below 0.000 and the ems’s are above the candles theres a possibility to trade low? thank you

  14. Hello rolf

    Just today I found this site, precisely looking for information related to macd. I just read the article and I found it quite useful and very well explained (apologies for my poor English).

    I would like to ask you, if this macd configuration, and the concepts explained in the article, can also be used for stock trading.

    Particularly, I do not trade in intra day, I am more of the trade to two months as maximum.

    Again many thanks for such an interesting and educational article.

    best regards.

    • Hello Isreal,

      I am glad that you liked the article and I hope to see you here again in the future 🙂

      I don’t trade stocks but indicators are ‘neutral’ tools which means that they only calculate pure price action (highs, lows, open, close) and so it can be applied to any market. The real power of indicators comes from the way the trader interprets the information and puts it into context.

      Regards
      Rolf

  15. Halo Rolf! Wie geht’s Dir?

    How can I get the red and green shaded area on the MACD on TradingView? I have 12,26,close,9,etc but how can I get the black line on the 0.000,please?

    I am on TradingView as well.

    Danke sehr schon!

    • Hi Sandrine,

      which red and green area do you mean? I looked at the article but couldn’t find it.

      The 0 line I made manually. Just take a horizontal like and put it in the indicator.

      Rolf

  16. Hey Bro.
    On which time frame MACD indicator more effective ?

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