Trading with MACD
Tutorials for forex beginners The MACD is a indicator developed by Gerald Appel based on two moving averages of price (close). This is a trend-following momentum oscillator. The MACD is calculated by taking the difference between two moving averages long and shorter exponential moving averages (EMA). These Type of the exponential averages are used because they show more quickly to changes in price, A “signal” or trigger line is also used, which is the nine-period exponential moving average of the MACD line. Below there is the MACD formula.
MACD = EMA1 – EMA2
Where:
MACD = Moving Average Convergence/Divergence Value
EMA1 = Current value of the first exponential moving average (using shorter period)
EMA2 = Current value of the second exponential moving average (using longer period) Exponential Percentage Moving Averages:
A weighted moving average calculated by taking a percentage of today’s price and applying it to the previous period’s moving average. The percentage is determined by the investor:
EMA = (Today’s close × Exp %) + [(Previous period EMA) × (1 – Exp %)]
Where: Exp % = The chosen exponential percentage
Signal Line:
SL = Previous period MACD + Exp % (MACD – Previous period MACD)
Where:
Exp % = The chosen exponential percentage for the signal line.
When the indicator is plotted on a chart, including the MACD line and the signal line, the most important aspect is the interaction between the two lines, as well as their positions relative to the equilibrium, or zero, line. When the MACD is above the zero line, it indicates that the shorter-period moving average is above the longerperiod moving average, which in turn indicates that the market is bullish on this security or index. More accurately, current expectations are more bullish than they were previously—demand is increasing. When the MACD falls below the zero line, the shorter period moving average is less than the longer-period moving average, indicating that demand is more bearish than it was in the past.
There are three ways for trade with MACD: Crossovers, OVERBOUGHT/ OVERSOLD , Divergence.
Trading with Crossovers MACD
Crossovers are probably the most popular use of MACDs: a sell signal is generated when the MACD crosses below the signal line, and a buy signal is generated when the MACD crosses above the signal line. In addition, the locations of these crossovers in relation to the zero line are helpful in determining buy and sell points. Bullish signals are more significant when the crossing of the MACD line over the signal line takes place below the zero line. Confirmation takes place when both lines cross above the zero line. Using the MACD in this way makes it a lagging indicator. Just like moving averages—which are also lagging indicators—the MACD works best in strong trending markets. Both the MACD and moving averages are intended to keep you on the “right” side of the market (on the long side during uptrends and on the short side or out of the market altogether during downtrends), meaning you buy and sell late. While you may enter a trade after the beginning of a trend and exit before the trend comes to an end, these indicators are intended to reduce your risk. Figure 1 shows the buy and sell signals generated for NZD/USD by the crossovers of the MACD line and the signal line. Over the period from June October 2008 to to November 2015, Figure 1 highlights the strengths and shortcomings of using MACD crossovers in a trading system. Note that the MACD works very well in strongly trending markets, because it is a trendfollowing indicator. When was in a period of “choppy” trading, the MACD generated trades in losses,
Trading with OVERBOUGHT/ OVERSOLD MACD
Another use for the MACD is to determine when a given security or index is either overbought or oversold. An overbought condition may exist when the price has experienced a significant upward move. At some point you expect that the price might fall and return to some more “normal” level. Likewise, when the price has seen an extended downward movement, an oversold condition may exist. At some point the price may be expected to rise to some normal level. A security or index may be overbought when you see the MACD rise significantly. During this period, the shorter moving average used in the MACD calculation is rising faster than the longer moving average. This is an indication that the price is overextending itself and, at some point, may reverse its course. When using the MACD to identify periods when a security or index is overbought or oversold, the best buy signals come when the MACD line and the signal line are below the zero line—the security or index may be oversold. Sell signals are generated when the lines are above the zero, where they may indicate an overbought condition. Unlike other oscillating indicators such as the RSI (relative strength index), there is no pre-determined overbought or oversold condition. High and low MACD levels are relative, depending on the security or index you are examining. You may need to study the behavior of the MACD over time before you can determine when the price is overbought or oversold. Looking at the MACD behavior over an extended period of time, you may be able to discern patterns where the MACD may rise or fall to relatively similar levels, at which point the price will fall or rise, respectively— and with it the MACD lines. You should also be aware that over bought and oversold levels need not be symmetrical for a given security or index (in other words, oversold levels can be higher relative to overbought levels and vice versa). Although the MACD is a lagging indicator when trading on the crossovers, it is more of a leading indicator when it is used to highlight possible overbought or oversold conditions. A leading indicator is useful because it alerts you to what prices may do in the future. Leading indicators offer the potential of greater rewards—getting in on the ground floor—while exposing you to greater risk—the possibility of the expected move taking place farther off or never taking place at all. There is the assumption that when a security appears to be oversold, its price will rise; conversely, there is the expectation that a price that is overextended or overbought will fall. The setting of this trading method is discretionary but is have a good profitbility. In the first example 4H chart NZD/USD possible trades with OVERBOUGHT/ OVERSOLD MACD method. Level 0.0028 and -0.0028.
In second example chart level 0.0018 and -0.0018.
Trading with divergence MACD
Divergence is one of the best-known types of non confirmation. A divergence is a separation between price and indicator that warns of a possible short- to intermediate-term change of trend. A bullish divergence arises during a down move when price makes either a lower low or a double bottom but the indicator makes a higher low or a double bottom. A bearish divergence occurs during an up move when price makes either a higher high or a double top and the indicator makes a lower high or a double top. divergences can occur at price tops or bottoms and also at price corrections.
corrections. The chart of NZD/USD in Figure shows both a bearish and a bullish divergence. We have add also two moving averages for to confirm the divergence and to entry in the market.
*Moving Average linear Weighted 7 period open.
*Moving Average linear Weighted 7 period close.
Buy
Bullish Divergence confirmed by MA close > MA open.
Sell
Bearish Divergence confirmed by MA close < MA open.
