MACD Indicator Guide: Explanation & Best Settings | LiteFinance (2024)

Dear friends! Today we will look at one of the most popular indicators – the MACD. This tool is easy to use and is often part of successful trading systems. Today I will tell you how to use MACD, how is MACD calculated and interpreted, and what sort of signals it gives. You will also learn how to set up and use the MACD technical indicator. We will look at examples of real trading on Forex, stock and metals markets.

Major takeaways

What is MACD Indicator: Definition & History

It shows the degree of divergence of the moving averages. Two EMAs are used for the MACD calculation that includes two moving average lines the fast and slow. Subsequently, the long moving average is subtracted from the short one, and then the difference is flattened using a simple moving average. As a result, technical traders see only two curves – the MACD line and a signal line. The difference between the two serves as the basis for trading signals.

The MACD momentum oscillator was created by the American analyst Gerald Appel in 1979. Appel initially planned to use it to analyze the buy and sell signals of the securities market. But, as is often the case with useful technical indicators, later it appeared on other markets, including Forex.

The Moving Average Convergence Divergence indicator is universal in its application. It shows a wide variety of signals: crossing, overbought and oversold zones, changes in position relative to the zero line, as well as when divergence or convergence occurs. The MACD signals perform well when they are combined with other technical indicators.

The only limitation is the timeframe. It is not recommended to set it below H1, since the Moving Average Convergence Divergence indicator readings will be affected by price noise —natural market volatility.

MACD Formula & Calculation

The MACD line of the indicator is a graphical result of calculating the difference between the fast and slow EMA. In the original version, it was displayed as a curve. The modern version of the indicator displays it as a curve, and the difference between the MACD lines as a diagram.

The MACD formula is as follows:

• MACD Line = EMA(CLOSE, FP) - EMA(CLOSE, SP).

Where:

• SP is the slow EMA period, and FP is the fast EMA period

The signal (slow) line is a simple MA of the MACD line. Here is its formula:

• Signal = SMA (MACD Line, SLP).
• SLP is the signal line period.

MACD Indicator Excel Sheet

Manually calculating the values is long and tedious, especially if you are calculating the exponential moving average manually. It is much easier to download the MACD indicator and immediately do technical analysis.

By the way, this technical analysis tool is available by default both inLiteFinance online terminal and in MT4.

An alternative option is an automated calculation in an Excel table.Here you can download the MACD technical indicator as a template or use the table online. If you have never worked with a Google spreadsheet, you can find a quick guidehere using the Bollinger Bands calculator as an example.

I tried to make the calculator as easy to use as possible.

For the calculation, you need to fill in the closing price values ​​in column “B” (highlighted in blue), and enter the period for calculating the moving averages of the signal line and the Moving Average Convergence Divergence itself (highlighted in red). All the cells in pink can be filled manually. Blue cells are calculated automatically and should be left alone. Text fields with reference information are marked with yellow.

Column B is already pre-filled with random numbers. To use the calculator, change these values ​​ to your own.

I left about 70 lines for entering price data, but you can copy the formulas of the last line and stretch the table lower.

Important! Column “B” does not have to be filled in full. However, for correct calculation you need to fill at least twice as many cells as the largest value of the moving average period. For example, in the figure above, the slowest EMA has the largest period of 24, which means you need to fill in 50 cells for correct calculation. Remember that the price values ​​are filled in order from top to bottom - from the earliest to the most recent.

The indicator calculates the result automatically based on the values ​​you entered. It is located on the right side of the table along with the price chart. The diagram is based on the last 30 filled cells and allows you to perform an analysis similar to the one in the trading terminal.

How to Use MACD: Theory

Now let's look at the extended description and application of the Moving Average Convergence Divergence indicator and find out when convergence occurs. This tool allows you to get several types of trade signals at once: divergence and intersection of lines, the location of the MACD histogram, divergence. I will tell you in detail how to detect the buy and sell signals and interpret them.

MACD Interpretation

Let's figure out how to read the chart and its MACD signals. Most versions of the two moving average system display two curves - a long and a short moving average. One shows the long-term market trend, and the other shows what is happening in the market now.

One of the main signals is a strong bullish or bearish divergence between the curves - overbought and oversold conditions. This situation is a sign of a trend reversal. When the moving averages converge, on the contrary, indicates the formation of price equilibrium, which is typical for a stable trend.

In the chart, the green zone marks the area where the moving averages converge, which tells us about the strength of the current trend.

The blue area marks the divergence section of the curves, which means an oversold conditions zone. After a short-term correction there is a sharp upward momentum reversal in the market, confirming our forecasts.

MACD Moving Average Crossovers

The fast MACD line is more prone to price action fluctuations. When the trend ends, it crosses the signal line. Below we will discuss how to spot and interpret the crossover signals in a two moving average system.

The blue circle in the chart marks the Moving Average Convergence Divergence signal for a bullish reversal. Thus, the MACD rises when the blue fast line crosses the red signal line upwards. Note that the reversal signal appeared with a slight delay.

The red circle marks the sell signals and the beginning of a bearish reversal. The fast MACD line crosses the signal curve from top to bottom. The downward movement has already begun and the indicators are going towards the zero line.

Signal Line Crossovers

Signal line crossovers are considered frequent MACD signals. There are two options for a MACD crossover:

• The faster line crosses the slower line from the bottom up and is in the negative zone. In this case, we are talking about a market reversal and the subsequent formation of a bullish trend where the MACD rises.
• The fast curve crosses the slower line from the top down and is in the positive zone pushing the MACD to turn negative. Sell signals start to prevail in the market which is a sign of an upcoming downward reversal.

Let's consider various options for crossing through the examples on Forex, stock and cryptocurrency markets.

In theEURUSD chart above, the blue circle marks the moment when the blue fast MACD crosses the signal line from the bottom up. As expected, after this signal appeared, the price action turned upwards.

You can see another bullish reversal scenario in the weekly charts. It is preceded by the crossing of the moving average lines in the negative zone (blue circle).

To understand better how to interpreter the situations when MACD line crosses the signal line in either ways we will use the BTCUSD as an example. Let us consider the trading signals similar to an early sign of a bullish reversal. In the area marked with a blue circle, the intersection of the fast and slow lines is clearly observed. At that moment, the price action has already started falling in the chart. The MACD crosses the signal line which confirms the beginning reversal.

Centerline Crossovers

The centerline crossovers of the MACD line occur when the two lines move into the positive or negative area. If the crossover signals indicate a top down movement, then we are talking about a strong downward impulse indicating a bearish crossover. And if the price action moves in the opposite direction, from the bottom up, this is an upward impulse causing a bullish crossover.

In theEURUSD chart, a blue circle marks how the MACD crosses the central line. This phenomenon occurs during the development of a stable directional movement and is a trend signal.

MACD Histogram

The MACD histogram displays the relative position of the EMA. In other words, it is a graphical representation of the average fluctuations in the price value.

When trading with the Moving Average Convergence Divergence indicator, first you should take into account the position of the columns relative to the zero line. If they are above 0, the trend is bullish, if below —bearish. The height of the bars is proportional to the distance between the curves, which opens up another opportunity for us to identify how overbought and oversold the zone is.

We should also take into account the slope, which shows how the balance of forces is changing:

• Upward slope - strengthening of buyers' positions.
• Downward slope - strengthening of sellers' positions.

In the above chart, the colored areas mark different behavioral patterns of the MACD histogram. A positive trend is observed in the green zone, both in the Moving Average Convergence Divergence histogram and in the price chart. The blue area looks like a flat, but price fluctuations occur at this time. However, they do not have sufficient strength to result in any meaningful movement. Finally, the red zone in the MACD histogram represents a strengthening bearish trend. A powerful downward impulse corresponds to it.

Divergences

Divergence is considered a leading signal. It shows the bullish or bearish divergences of the lines connecting the extremes of the price chart and indicator values. For MACD, divergence can be tracked both by moving averages and by the readings of the indicator histogram.

There are three types of divergence:

1. Classic (regular) - indicates an upcoming trend reversal
2. Hidden - indicates the continuation of the current trend
3. Extended - more common in the sideways movement and indicates the continuation of the last trend

The picture above shows all three types. Please remember the signals for each one. I wrote more about this signal in a large review with a detailed description of each type of signal for the MACD moves and other indicators. You can find the articlehere.

If you are confused and have problems studying all three types, I recommend remembering the signs of only one type - classic divergence. Only the classical divergence is a signal of a trend reversal! If you see divergence, but the trade signals are different, then most likely such a signal indicates the continuation of the trend.

You can find a detailed description of the signs for all types of divergences in my article “Divergence and convergence on Forex. What it is and how to use it correctly”.

Here I will just briefly remind you how to use the MACD divergence indicator using the example of a regular divergence.

In the price chart above, the blue line marks local lows, each of which is lower than the previous one. Similarly, in the MACD chart, I connected the lower limits of the chart with a blue line. Since the line is directed downward in the price chart and the macd moves upward, and the signal itself occurs within the downward trend, we can talk about a bullish divergence, i.e. change from a bearish trend to a bullish one.

The same principle works for a classic bearish divergence, only we look for a divergence at the highs, and the signal itself must be within a bullish trend.

Strategies of MACD indicator in Forex Trading

Traders use a wide variety of MACD strategies. Here are some of them:

1. Buy and sell at the MACD intersection. This is a trend following strategy. A fast indicator curve crossing the signal line indicates the beginning of a new trend. At this moment, we have an opportunity for a successful market entry.
2. The MACD divergence indicator can predict reversal points in the market with high accuracy. Trading on the divergences of the extreme points of the price chart and the MACD histogram is characterized by a small percentage of false signals.
3. Look for extreme MACD values ​​in anticipation of a market reversal. The logic behind this method is that trends reverse at the highs and lows of the MACD histogram. The reversal moment is considered the best opportunity to open positions.
4. Use MACD as a trend filter when looking for market entry points. If you are using signals from other indicators, the moving average lines can be an additional confirmation of the forecast.

MACD strategy for beginners

Buy and sell on the MACD crossover

The easiest way to use MACD in Forex is trend following. This method can be used even by beginners taking their first steps in trading:

• Buy when the fast MACD line crosses the signal line from the bottom up and the MACD histogram rises above 0 and becomes positive.

• Sell when the fast MACD line crosses the signal line from the top down, and the indicator histogram falls below 0 and takes negative values.

We will place our stop loss just below the nearest local extremum. You can close the position by indicator signals or by setting a take profit at a distance of one or two stop losses.

Let's look at this strategy using the example of the XAUUSD.

In the blue circle, we see the fast red curve crossing the slower line of purple color upwards. Immediately after this, the MACD histogram moves to the positive area. The presence of both signals of the strategy allows us to open a long position at the close of the candle (blue line). Set the stop loss just below the previous local low.

As long as the MACD histogram is growing, we can be sure of the strength of the bullish trend. A little later, a bar is formed, marked with a red circle. It is lower than the previous one, which indicates a decrease in buyers' activity.

You may have noticed another alert of the MACD indicator that I mentioned —a noticeable divergence of the two moving averages. It indicates an overbought zone and possible trend reversal. Therefore, when the candlestick closes at the level of the green line, where there is a large divergence between the MACD curves and a decreasing bar, we take the profit, since the trend may turn negative.

Alternatively, you can let the trade close by take profit, which, depending on the risk management, can be equal to one or two distances from the position opening level to the stop loss.

Predict Turning Points in the Market

This is a more complex strategy for the MACD indicator. It is based on classic divergence signals when:

• There is a positive trend in the price chart, and local highs are constantly updated. In this case, the MACD line is not going up. Alternatively, we can look at the MACD histogram. This means that the price continues to move upward by inertia, and the bullish trend has actually already lost its strength.
• The price is updating local lows, but the MACD curve (or MACD histogram) is no longer forming lower limits. This means that the bearish trend is close to completion.

In the first case, a bearish divergence occurs prior to a market reversal. After the MACD line crosses the zero line, an opportunity opens up to enter the market with a sell position. In the second case, a bullish divergence occurs. Such a move creates a buy signal and the opportunity to go long.

The BTCUSD chart above shows a bearish divergence marked with diagonal blue lines.

Important! In a downtrend we compare lows, and in an uptrend - highs.

The entry point is the moment the first green bar appears on the diagram. At the close of the candle, open a long position (blue horizontal line). Set the stop loss just below the previous low. Let the order close by take profit equal to two stop losses (green line).

Using the example of the American stock exchange index, I will show you an alternative trading option. We define bearish divergence by the price highs and the fast MACD line. As you can see, the price is updating highs while the MACD chart is moving down, creating an indication that the upward movement is nearing completion.

When the chart enters the negative zone, open an order (blue horizontal line). Set the stop order just above the high. Exit from the market a little later, when the next red bar of the chart is formed slightly below the previous one (green line).

Predict Market Reversal

The use of the MACD as an oscillator for trading on extreme values ​​is a common practice among traders. This strategy is based on the following rules:

• Sell ​​when on the histogram the two moving averages turn positive reaching high values ​​and a smaller bar is formed.
• Buy when the MACD histogram reaches high negative values ​​and a bar is formed that is shorter than the previous one.

The rules for setting stop losses are the same as in the previous examples. Exit the market when the MACD histogram starts moving in the opposite direction.

In the EURJPY chart, the blue circle marks the moment when the histogram reaches its high values. Then the decline begins. Open a short position (blue line) on the first bar that is shorter than the previous one. Set the stop loss just above the previous high (red line).

Next, we closely monitor the behavior of the MACD histogram, which, amid a fall in price, goes into a negative value zone and forms a new bottom (red circle). We exit from the market after the formation of the lower red bar (green line).

Use MACD as a trend filter when finding trades

One of the basic rules is trading on the side of the market. The MACD is great for identifying stable strong trends. Choosing the right side of the market is easy:

1. Choose the timeframe on which you will trade.
2. Open a chart one or two timeframes higher. For example, if you are trading on a four-hour chart, open a daily chart.
3. If the MACD histogram of the indicator develops on positive values then the direction can turn positive, and open only long trades; if in a negative direction, open short position trades.

Let's try to identify long-term strong trends in the dailyEURUSD chart. Inside the blue area, there is positive growth of the MACD histogram. Therefore, all these days you should give priority to long positions. Then a decline is observed in the red area. When the MACD histogram turns to the negative side on smaller timeframes, it is recommended to open only short positions.

Best MACD strategy

Using MACD indicators in Real Trading: Examples

One of the advantages of the MACD is its versatility. Originally designed for stock market analysis, it has proven to be effective in other markets. Modern traders actively use the MACD to trade currency pairs, precious metals, energy, stocks, futures, and even cryptocurrencies. Below I will talk about trading the S&P 500, gold, and the EURUSD.

S&P 500

For the index, the most profitable strategy is to trade at the crossing while taking into account the position of the histogram. Buy and hold the position after the fast MACD line is crossed from the bottom up and the MACD histogram moves into the positive zone. Sell after the curve of the signal line is crossed from the top down and the MACD histogram moves into the negative zone.

The blue circle in the four-hour chart marks the moment when the signal curve crosses the MACD line from the bottom up and the MACD histogram moves into the positive zone. This is a signal to open a long position. We enter the market on the first positive bar of the MACD histogram (blue line). Stop loss should be placed below the previous low.

By analogy with the previous examples, the exit from the market should be carried out at the moment when the next column forms below its predecessor (green circle). However, in this case, the profit will be small (green line).

Alternatively, we can use an additional condition —changing the slope of the fast MACD line. On the chart, this signal appears a little later in the area of ​​the purple circle. At this point, we close the position, making a much larger profit.

Gold

You can trade gold using the same system as the , but with one condition. It’s opening extremely long positions. The trading history shows low effectiveness of selling at crossings.

The blue oval marks the area in the chart where the red fast MACD line crosses the slow one from the bottom up. Open the position the moment the MACD histogram moves into the positive zone (blue line). The red line marks the stop loss located just below the nearest low.

During the development of the trend, the MACD histogram indicators are declining, but the MACD curve continues to move up. Similar to the previous example, we are waiting for a double signal. It happens a little later (green oval), when the curve reverses down and another lower bar is formed. At this moment we exit the market (green line).

US Dollar

For the US dollar, the effectiveness of the MACD trading strategy is medium. It can and will be profitable, but you should not count on consistently large profits.

As in the previous examples, we open a long position (blue line) at the crossing of the curves and the MACD histogram moving to the positive zone (blue oval), and set the stop order below the low (red line). Then we are waiting for the signal expressed as the simultaneous decline in the histogram and signs of a reversal of the MACD line. This occurs within the green oval. We take the profit at the level of the green line.

Best MACD Settings

It is generally accepted that the optimal MACD settings are as follows: 12, 26, 9. They are best suited for hourly charts. But such settings work well on any timeframes close to H1. That is why they are set by default on almost all terminals.

Here's what these parameters mean:

• 12 - fast EMA period;
• 26 - slow EMA period;
• 9 - signal MA period.

Intraday Settings for MACD

Various charts from M1 to H1 can be used for intraday trading. We’ve covered H1 and similar timeframes above, so now we will consider the scalping settings.

MACD indicator settings 1 min:

• 13, 21, 1;
• 21, 34, 1;
• 31, 144, 1.

These settings of the MACD indicator for the M1 timeframe can be applied either separately or together if the trading strategy involves the use of several charts at once. The first option of parameters is the most sensitive to price fluctuations, and the last one is the least sensitive. Please note that all three types of settings do not involve the flattening of the signal line.

Use parameters 21, 31, 1 for 5 and 15 minutes. But for trading in half-hour charts, it is better to choose the standard settings 12, 26, 9.

Best MACD Indicator for MT4 & MT5

The MACD Color is considered the best version. Its main advantage is the easy-to-read histogram. By default, when the columns are in the positive zone, they are colored green, and when in the negative value zone, they are colored red.

The MACD Color indicator for MT4 can be downloadedhere. To download version for MT5 go to this page.

And if you want to try trading in automatic mode, I recommend that you check out the MACD Sample Expert Advisor built into MT4. By default, it already contains the optimal parameters for trading in the one- and four-hour timeframes. If you want to adapt it to other charts (for example, weekly charts), even beginners will be able to figure out the settings.

MACD Screener

The MACD momentum indicator can be used not only for traditional technical analysis, but also as one of the tools for selecting assets for investment. How do you find the right trading instrument to boost your trading style?

You can take advantage of stock screeners - analytical platforms on which information about securities is collected. They allow you to filter assets by dozens of parameters. A good selection of such programs can be found in the article "Stock Screener - Your Guide to the Stock Markets of the World."

There you will find such popular monitoring platforms as:

1. Google Finance Stock Screener;
2. Finviz.com;
3. Screener.finance.yahoo.com;
4. Stock-Watcher.

However, all these services have one drawback - they cannot filter by technical indicators. The most popular screener that can do this is tradingview.com. Its great advantage is the ability to work not only with stocks, but also with cryptocurrencies and the foreign exchange market.

In order to filter by MACD indicators, select the required screener and click on the rightmost button with three dots.

Type in “MACD” in the search box and tick the boxes that appear. Two new columns will be added to the table, reflecting the value of the MACD parameters and even a sell or buy signal for these indicators. Another advantage of thetradingview screener is the option to set alerts, a set of pre-configured templates for filtering, and the ability to create your own.

There is another good screener on the www.investing.com portal. But it only works for the stock market.

You can find it in the main menu of the website. To do this, find the "Tools" tab and click on the "Stock Screener" link.

Then, in the window that opens, pay attention to the menu in the upper left corner. Select the item "Technical indicators", then "MACD" and change the default settings with your own parameters in the window on the right. For example, by using the sliders I indicated the range of values ​​ to filter the quotes of securities. In the lower window, the service showed a selection of stocks matching the parameters.

MACD vs. other Indicators

As other technical analysis tools, MACD has its own strengths and weaknesses. Below I will compare it with popular technical indicators, describe the advantages and disadvantages, and also touch on the topic of combining indicators.

MACD vs. RSI

While the MACD shows the difference between the moving averages, the RSI works in a slightly different way. It shows the flattened difference between past and current price fluctuations, or simply overbought and oversold levels. MACD is good on long timeframes and RSI is good on short ones.

These two tools often provide complementary information and therefore are often used together in some MACD trading strategies. There is even a MACD RSI momentum indicator —the most accurate scalper that I have come across. You can download it here.

If you want to learn more about the RSI and apply it together with MACD, I recommend reading the article "RSI Relative Strength Index Indicator".

MACD vs. Stochastic

Compared to Stochastic, MACD is considered more useful in trending financial markets. At the same time, the oscillator shows the best results when the market is moving sideways. To get a more universal trading system that does not depend on price behavior, you can combine at once MACD with other technical indicators like Stochastic in different periods at the same time frame when one instrument filters the readings of the other.

You can learn more about Stochastic in the article "Stochastic Oscillator: How to Use the Stochastic Indicator in Forex Trading".

MACD Limitations & Critics

It is naive to think that MACD is the perfect momentum indicator. Like other technical analysis tools, it has a number of limitations:

• Performance varies across assets and markets. We have seen this with the S&P 500, gold, and the US dollar.

• False signals are more common than we would like. Therefore, it is best to use MACD in conjunction with other technical analysis tools.

• MACD is ineffective when used on low timeframes, mostly due to signal lagging. Therefore, scalping strategies involve the use of additional oscillator indicators.

• MACD is a trend-following momentum indicator. This means that extreme readings will not always indicate an imminent reversal. It is better to use oscillators to get such signals.

And here is what traders think about the limits of the MACD.

Summary

The MACD was developed several decades ago. However, this indicator is still capable of giving quite reliable trading signals when used in trend strategies. The MACD is especially effective when trading on a long-term horizon and when used on large timeframes. But traders who make money on short-term trades may have problems with the quality of signals.

It is also important that the MACD is a popular basis for developing your own indicators (example: MACD-RSI) and MACD trading strategies. I wrote about one of these more than two years ago:SK-FX —a high precision strategy.

Such popularity confirms the important role of the MACD indicator in technical analysis and makes it mandatory to study for everyone who is just starting to master the trading craft. For the best learning efficiency, I recommend that you go to the terminal right now and try the MACD yourself. If you have just started your trading path, trading on a demo account without registration will help you avoid losses!

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Price chart of GOOG in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.