The technical indicator MACD or Moving Average Convergence Divergence was created by the American Gérald Appel and has several interesting features. Basically, designed to detect moving average crosses more quickly (which, it should be remembered, often give late signals), it is used by many traders in the world of technical analysis.

Calculation

There are two lines for this indicator.

The first one, often materialized in blue, called ”MACD” can be considered as an oscillator and represents the difference between two exponential moving averages of different periods (a short-term exponential moving average 12 periods an exponential moving average of longer-term over 26 periods). Exponential rather than simple moving averages are used because, as we have already seen, they give more importance to the latest prices, allowing more reactive signals and less delayed positions.

The second, called the “signal line”, represents an exponential moving average calculated over 9 periods with respect to the first curve (MACD).

The name of this indicator comes from the different crossings that occur between these two lines and that can be called ”convergences-divergences”.

Finally, a histogram has been added to simplify reading (small bars that oscillate above and below zero). This histogram simply displays the difference between the ACD line and the signal line. It allows to visually materialize the difference between the two curves and gives indications according to the color: blue, the MACD is above its signal line and red, the MACD is below its signal line.

 

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Example of daily MACD on Bitcoin: in blue the MACD line (the difference between the exponential moving averages 12 in purple and 26 in yellow) and in red the signal line (exponential moving average over 9 periods of the MACD line). It is interesting to note that when the exponential moving averages on the graph cross each other, the blue MACD line crosses the zero level.

 

Trading strategies

The first strategy is to take a buying position when the MACD cuts its signal upwards and selling when the MACD cuts its signal downwards.

 

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The signal line cut the MACD down: a sale was possible on Bitcoin.

 

The second strategy is the study of divergences. Two possible methods: read the divergences on the MACD itself or on the histogram.

 

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First way to use divergences: by reading them on the MACD.

 

 

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The second way to read the divergences: on the histogram.

 

A third strategy, often used by scalpers or day traders, can be used. This is a rather special reading of the histogram. When one of the bear bars is smaller than the previous one (ascends), we can anticipate the crossing of the MACD with its signal and take a position even earlier.

 

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Example of a possible purchase: the bar (dotted line) is smaller than the previous one. This makes it possible to anticipate the crossing of the two lines of the MACD indicator and allows an even more advanced position, but also gives false signals.

 

The further away the MACD is from its signal line, the stronger the current trend.

Conversely, if the MACD crosses its signal line in all directions, it indicates a high probability of being in a range.

 

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A typical example of lateralization or range. The MACD continuously crosses its signal line and both lines oscillate around the zero value. It can be concluded that there is no clear trend.

 

The MACD indicator is very popular because it reacts and gives some signals upstream of the signals that could be given by moving averages.

However, the more “dynamic” an indicator is, the false signals it gives, and the use of this indicator is no exception to the rule. It should, therefore, be used with other indicators to give maximum convergence before entering the position.


Want to learn more? The following articles may be of interest to you

”Parabolic Stop And Reversal (SAR)”

”Fibonacci Extensions” 

”Pivot Point”

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