The MACD indicator, or Moving Average Convergence Divergence indicator, is one of the most widely used technical indicators in trading. This indicator was first developed by Gerald Appel in the late 1970s and has become a staple tool for many traders in the stock market and other financial markets.
In this guide, we are exploring the basics of how to read MACD, the infamous MACD crossover as well as other trading strategies, and the best settings for daytrading explained.
Introduction to the MACD indicator
The MACD indicator is a technical analysis tool that is used to measure momentum and is calculated by taking the difference between two moving averages. The MACD line is the faster moving average, while the signal line is the slower moving average.
MACD stands for Moving Average Convergence Divergence and is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. A 9-period EMA of the MACD, called the “signal line”, is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals.
In simple terms, a buy signal is generated when the MACD line crosses above the signal line, and a sell signal is generated when the MACD line crosses below the signal line.
The MACD indicator is used to identify trends, as well as potential reversals.
When the MACD line is above the signal line, it indicates that the trend is bullish. Conversely, when the MACD line is below the signal line, it indicates that the trend is bearish.
Additionally, the MACD indicator can be used to identify potential entry and exit points for trading.
By monitoring the crossover of the MACD line and the signal line, you can determine with a bit more certainty when it may be an optimal time to enter or exit a position.
Overall, the MACD indicator is a powerful tool that can help you with your technical trading in a variety of different ways depending on how you use it. It is important to note, in the same way with all technical indicators that the MACD should not be used in isolation, but rather in conjunction with other technical indicators and fundamental analysis.
The MACD Crossover
The MACD crossover is a popular technical indicator that you can use to help determine when trends are about to change. The crossover itself is just the moment when the MACD crosses over the signal line, and depending on which direction it crosses, the indication taken by traders is different.
When the MACD line crosses above the signal line, it is typically seen as a bullish signal, indicating that prices are likely to rise. Conversely, when the MACD line crosses below the signal line, it is typically seen as a bearish signal, indicating that prices are likely to fall.
The MACD crossover can be used in conjunction with other technical indicators to help confirm trading signals. For example, you may wait for the MACD line to cross above the signal line and then look for a price breakout on the chart before entering a trade.
How To Read MACD Signals
Knowing how to read MACD, or how to interpret what is showing you, can be a difference maker in your trading results. Using the MACD line, along with signal line, and the histogram properly can be quite an eye opener as far as momentum trading, and picking reversal points goes.
The MACD histogram is a visual representation in bar form of how the momentum is developing within price action. The histogram is calculated by taking the MACD line, and deducting the MACD signal line so can be a very good visual indicator of the deviation in the two lines in more traditional bar form.
MACD Buy Signal
A MACD buy signal occurs when the MACD line crosses above the signal line. This indicates that the 12-period EMA is starting to outpace the 26-period EMA, suggesting that a bullish trend may be emerging. Traders can then enter into long positions on this signal, with a stop loss just below the recent lows in order to limit potential losses.
MACD Sell Signal
A MACD sell signal occurs when the MACD line crosses below the signal line. This indicates that the 26-period EMA is starting to outpace the 12-period EMA, suggesting that a bearish trend may be emerging as the shorter term EMA is losing momentum. Traders can then enter into short positions on this signal, with a stop loss just above the recent highs in order to limit potential losses.
Best MACD Day Trading Settings
There are a variety of different MACD settings that you can use when trading almost any instrument, each with its own strengths and weaknesses.
The most important thing to remember when you are looking for the best MACD settings for daytrading is that no single setting is perfect for all markets and all situations. It’s important to experiment with different settings in order to find what works best for you and your trading style.
Three main parameters that make up the MACD indicator are the fast moving average (FMA), slow moving average (SMA), and the signal line. These are the variables you can play around with. The FMA is calculated by taking the average of a security’s closing price over a certain time period, while the SMA is simply the average of a security’s closing prices over an even longer time period.
Most common MACD settings include using a 12-period EMA for the FMA, 26-period EMA for the SMA, and 9-peroid EMA for the signal line (referred to as 12,26,9).
What is the Best MACD settings for 5 minute chart?
If you are looking for a MACD daytrading setting for intraday use, you may consider switching up the series of numbers above to EMAs of 3,10,16 or 24,52,9; or alternatively find something that works for you.
The below is a representation of 24,52,9 whereas the chart above is on standard settings of 12,26,9. Both charts are of the 30 minute, but the representation you see and the smoothness of the MACD is greater in the below version.
The most important thing when using the MACD indicator is to experiment with different settings and find what works best for your trading style. Whether you’re a short-term day trader or long-term swing trader, there is no “one size fits all” setting that will guarantee success. So be sure to play around with the various parameters and see what works best for you.
History of MACD, and creator Gerald Appel
Gerald Appel was a financial analyst and author who developed the MACD technical indicator in the late 1970s.
Appel began his career working as a stockbroker on Wall Street. He later became a research director at a mutual fund company, where he began developing technical indicators to help him make investment decisions.
In 1978, Appel published the book “Technical Analysis: Power Tools for Active Investors,” which included a section on the MACD indicator.
The MACD has grown to be one of the most popular technical indicators used by traders and investors today and is used for a variety of reasons, including to measure the momentum of a stock or index, and can be used to generate buy and sell signals.
While there are several different theories on how exactly to use the MACD indicator, one of the most popular and widely used approaches is to look for crossovers between the MACD line and either a signal or trigger line.
Despite its continued popularity since creation, there are some traders who argue that the MACD indicator may not be as reliable as many believe. In particular, some believe that this indicator may be susceptible to false signals or “whipsaws”, which can lead to losses for those who blindly follow it without taking other market factors into account.
Overall, though, the MACD indicator has proven to be a valuable tool for many traders, and is likely to remain an important part of technical analysis in the years to come. Whether you are new to trading or a seasoned veteran, it’s important to understand how this indicator works and how you can use it to your advantage