How To Trade the MACD With Proven Methods

Watch the full video here: How I Nailed Trading with the MACD Indicator (Step-by-Step Guide)

The MACD trading strategy can revolutionize your trading system if appropriately applied. It eliminates false signals and bull traps on the front side of the price chart and provides discipline during congested trading periods. Whether you’re a stock, forex, or cryptocurrency trader, the MACD indicator will be of great use to you when it comes to determining trends and exit/entry points.

Let me explain how the Moving Average Convergence Divergence works and how you should use it.

What Is MACD and How Does It Work?

The MACD indicator, or Moving Average Convergence Divergence, is a trend-following momentum indicator measuring the difference between two sets of exponential moving averages (EMAs), usually 12 and 26 periods. The MACD line is the distance between a shorter and longer moving average. The shorter moving average is typically the 12-day exponential moving average (EMA) and represents the stock’s more recent price movement.

• MACD Line: It shows the variation between the two EMAs.
• Signal Line: A 9-period EMA of the MACD line defines the buy signals and sell signals.
• MACD Histogram: A bar chart where you can quickly identify the difference between the MACD line and the signal line to tell you the strength of the momentum.

Whenever the MACD line crosses the signal line, one should expect an uptrend because it is a bullish signal. On the other hand, when the line drops below the indicator, it is a bearish signal in a downtrend. These crossover points are crucial for trading opportunities in any financial market.

Example of a bullish crossover, indicating a potential upward trend as the short-term moving average crosses above the long-term moving average

The Role of Moving Averages in MACD

To fully utilize the MACD, it’s essential to understand the role of moving averages.

• Experimental Moving Averages (EMAs) respond faster to price movements than Simple Moving Averages (SMAs), making them ideal for active trading.
• Longer-period moving averages, such as the 20 or 200 EMA, create ribbon patterns when stacked, visually confirming an uptrend or downtrend.

These moving averages are the foundation of the MACD, enabling it to provide clear signals during volatile market conditions.

MACD Settings: Why Default Works Best

The MACD with default settings of 12, 26, and 9 is popular due to the development of a common language on the trading floor. Consistently holding these settings guarantees that the trading signals you send out match those of other traders in the market, enhancing the credibility of trades.

Default MACD settings: Fast Length at 12, Slow Length at 26, and Signal Length at 9, used for momentum and trend analysis.

For beginners, I recommend sticking to defaults for best MACD performance and ensuring that the settings are used uniformly across their working time frame, whether day trading, swing trading, or longer-term strategies.

How To Use MACD in Trading

The MACD trading strategy involves identifying crossover signals, confirming market trends, and avoiding false signals.

Here’s how you can apply it effectively:

Spotting Crossover Signals

• Bullish Crossover: When the MACD line crosses above the signal line and moves above the zero line, it indicates a potential uptrend and generates a buy signal.
• Bearish Crossover: When the MACD line crosses below the signal line, it signals a downtrend and generates a sell signal.

Confirming Trends With Divergences

• Bullish Divergence: Occurs when the price makes lower lows while the MACD makes higher lows, including weakening downtrend momentum.
• Bearish Divergence: Occurs when the price makes higher highs, but the MACD makes lower highs, signaling a potential reversal.

Avoiding False Signals

MACD is a lagging indicator, meaning since it derives its data from moving averages it takes time before signals appear. Some traders will use MACD alongside other technical indicators such as RSI and stochastic or Bollinger Bands. For example, an RSI reading above the oversold signals or a stochastic oscillator with oversold signals usually coupled with a bearish divergence in MACD is persuasive.

Applying MACD in Real-Time Trading

Let me take you through a stock I traded, where I locked in $5,000 in profit. Breaking news caused a price spike at 9:00 a.m. Initially, I didn’t rely heavily on MACD, as breaking news creates rapid divergence in moving averages. However, as the price stabilized, MACD gave clear signals on when to exit and avoid overstaying my welcome.

This signal allowed me to exit the trade with profits before the stock consolidated. I avoided overstaying my welcome by combining the MACD with candlestick patterns and observing the overall market conditions. It can effectively also navigate periods of high volatility.

Tips for Beginners Using MACD

The MACD is a great place to start if you’re new to trading. Here are my top tips for getting the most out of it:

• Stick to Default Settings: Use the standard 12, 26, and 9 configurations for consistency.
• Focus on High-Probability Setups: Only trade setups where the MACD aligns with the trade direction. Avoid trading against MACD signals until you have more experience.
• Stop-Loss Setting: Set a stop-loss when using MACD signals to manage risk.
• Practice First: Use a demo account to test your understanding of MACD before risking real money.

Recommended Reading: The Power of Knowing When to Walk Away by Annie Duke helped me understand that the best traders will trade longer and dig deeper when the market’s hot and will walk away even if they don’t hit their daily goal when the market is cold.

Importance of Discipline in Trading

The MACD is a powerful tool, but no indicator can replace disciplined trading. Here’s why discipline matters:

• Avoid Emotional Decisions: The MACD helps remove emotions from trading by providing clear, objective signals.
• Preserve Capital: Walking away from “cold” markets protects your funds and mental clarity.
• Focus on Process, Not Profits: Remember, consistently applying your MACD crossover strategy leads to long-term success.

Conclusion: Mastering the MACD

The MACD indicator is one of the most important indicators in technical analysis since it provides a clear picture of trend reversals and market signals while avoiding fake signals. If you can dissect and implement it, it will improve a trader’s efficiency and accuracy. Always focus on the process; the profits are a byproduct.

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