As you probably already know, there is no single “best” indicator of technical analysis. Each of them is right for a given moment and for a given place. However, if they had to choose their favorite tools, many traders would answer “the MACD.” The moving average convergence divergence is a trend tracking indicator used to identify an emerging trend, both upwards and downwards. It is one of the most effective and absolutely used technical analysis tools. Today’s article will look more closely at the indicator and learn to apply it in trading.
What is MACD?
The Moving Average convergence divergence will help you identify emerging trends, probably the most important aspect in any successful trading venture. However, like any other indicator, the MACD must be used correctly in order to offer tangible results. It is therefore necessary to understand what is in your hands.
In simple terms, the MACD is a combination of two lines: the slow-moving average (orange) and the fast-moving average (blue). By default, the fast-moving average is calculated based on 12 periods, while the slow-moving average uses 26. The difference between the two is shown by the red and orange bars – hence the terms “divergence” and “convergence” in the indicator’s name.
How to use it in trading?
MACD is a complex tool that can be used in various ways:
First, you can search for the point where the two moving averages intersect. When the fast-moving average rises above the slow, an upward trend is likely to form. Conversely, when the fast-moving average falls below the slow one, a downward trend may occur. This is the most common way in which the MACD is used in trading.
Secondly, it is important to keep an eye on the so-called crossover of the centerline. When the fast-moving average moves beyond the centerline (white), the trend is likely to continue upwards. Conversely, if the fast-moving average moves below the baseline, the price may fall. This is not perhaps the most common mode of use of the MACD, but it is nevertheless a useful element.
Finally, it is possible to wait for something called divergence. The trend may soon be reversed when the price action and the MACD chart show an opposite movement. An upward divergence is formed when an asset registers a lower minimum and the MACD forms a higher minimum. A downward divergence occurs when an asset registers a higher maximum and the MACD Line forms a lower maximum. This is an advanced technique that requires some practice before being applied correctly. In any case, it deserves your attention.
Note that all indicators, regardless of their reliability, can sometimes generate false signals. Therefore, it is advisable to check the signals you receive and compare them with other indicators or different time frames (preferably with both).