The moving average convergence divergence (MACD) oscillator is one of the most popular technical indicators. Having characteristics of both leading and lagging indicators, along with a moving average trigger line,the MACD presents the kind of versatility and multifunctionality traders covet.
Perhaps more importantly, the trend-following and momentum-forecasting abilities of the MACD are not bogged down by extreme complexity. This makes it accessible to both novice and experienced traders and allows for easier interpretation and confirmation. For this reason, many consider it among the most efficient and reliable technical tools.
Though it is not useful for intraday trading, the MACD can be applied to daily, weekly, or monthly price charts. The basic MACD trading strategy uses a two-moving-averages system—one 12-period and one 26-period—along with a nine-day exponential moving average (EMA) that serves to produce clear trading signals. The interaction between the two moving averages line, its own nine-day EMA and the basic price action, serves as the foundation for MACD interpretation.
HowMACDCan Be Used
Traders can use the MACD for signal line crossovers when the nine-day EMA is crossed by the two-moving-averages line. Additional signals are generated when the two-moving-averages line crosses above or below the zero centerline on the oscillator. You can spot divergences between the MACD lines and the price action on the chart, highlighting weak trends and possible reversals.
Understand that no technical tool can forecast with certainty. No trading system can either guarantee profits or eliminate risks. While the MACD has many strengths and can help traders spot trend reversals, it is not infallible and struggles, particularly in sideways markets. Since the MACD is based on underlying price points, overbought and oversold signals are not as effective as a pure volume-based oscillator. Always use other technical tools to confirm signals produced by the MACD, asit is the ability to work in conjunction with so many other tools that give the MACD its reliability.
FAQs
The trading strategy utilizing MACD is often considered reliable due to its effectiveness in identifying price movement patterns and evaluating the momentum of trends.
How accurate is MACD strategy? ›
While the MACD has many strengths and can help traders spot trend reversals, it is not infallible and struggles, particularly in sideways markets. Since the MACD is based on underlying price points, overbought and oversold signals are not as effective as a pure volume-based oscillator.
What is the success rate of MACD strategy? ›
MACD with PRC has a 90% success rate. A stock's moving averages should at least approach one another, if not cross, before you act on that stock. MACDs rely on three exponential moving averages instead of one or two. Look for patterns where the three moving averages come together closely.
Do professional traders use MACD? ›
MACD is used by technical traders in stock, bond, commodities, and FX markets. Some MACD strategies include the histogram, the crossover, the zero-cross, the money flow index, and the relative vigor index. One of the biggest risks of the MACD is that a reversal signal can be a false indicator.
What is the major flaw of MACD? ›
MACD is a popular technical indicator used by traders across many different markets, however its usefulness has been questioned. One of the main problems with divergence is that it can often signal a possible reversal but then no actual reversal actually happens—it can produce a false positive.
What is the disadvantage of MACD? ›
Cons of using the MACD
If a trader has a longer-term outlook that this, the MACD may not be suitable. Another potential downside is that the MACD is a trend following indicator. This means that the indicator gives its signals as the trend occurs, not before it starts.
Does MACD give false signals? ›
MACD can generate false signals when the price moves sideways or in a range-bound market, as it may produce crossovers that do not reflect the true trend direction. MACD can lag the price action, as it is based on historical data and smoothing techniques.
Is there a better indicator than MACD? ›
The Schaff Trend Cycle (STC) is a technical analysis indicator used in trading and investing to identify trends and generate trading signals. The STC indicator helps to identify trends in a smoother and more responsive manner compared to traditional MAs and even under certain parameters, the MACD.
What is the best strategy to use with MACD? ›
The strategy is to buy – or close a short position – when the MACD crosses above the zero line, and sell – or close a long position – when the MACD crosses below the zero line. This method should be used carefully, as the delayed nature means that fast, choppy markets would often see the signals issued too late.
Should I use RSI or MACD? ›
Some traders might prefer the MACD for its possibilities of spotting trend reversals and displaying the strength of momentum. In contrast, other traders could explore RSI since it shows the extent to which a stock, for example, can be overbought or oversold.
Strong trend: When the market is in a strong trend, the MACD may lag behind the price action and generate signals too late. Traders may want to use other indicators, such as the Relative Strength Index (RSI) or the Stochastic Oscillator, to complement the MACD in these situations.
Which indicator has the highest accuracy? ›
The Moving Average Convergence Divergence (MACD) indicator is often considered one of the most accurate technical indicators. That is because it uses a combination of moving averages to spot potential buy and sell signals.
What works best with MACD? ›
MACD is best used with other indicators and forms of technical analysis. Support and resistance areas and candlestick chart patterns, along with the moving average convergence divergence indicator, can help identify potential market reversals.
What is the most accurate MACD timeframe? ›
MACD is best used with daily periods, where the traditional settings of 26/12/9 days is the default.
Which is more accurate RSI or MACD? ›
The MACD is known for its accuracy in identifying trends and momentum in the market, while the RSI is better at detecting overbought or oversold conditions. Despite their usefulness, both indicators can produce false signals if used in isolation or with the default setting.
What is the accuracy rate of MACD indicator? ›
Is MACD a good indicator? No, our research shows that MACD is not a good indicator on standard settings using standard charts. It has a low success rate of 3 to 50%, with an average of 60% of losing trades.
