The Ultimate Guide to Understanding the MACD Indicator: Tips, Strategies, and Applications for Traders
MACD, or the Moving Average Convergence Divergence, is one of the most popular technical analysis indicators. This can be employed to determine the direction and strength of a security’s price trend.
It is applied in this article by Colibri Trader, which details how the MACD functions, with examples of developing principles and detailed text to show how it can be applied during trading.
 Understanding MACD
MACD makes use of moving averages in the following way: on monitoring the price moves of stocks, this will better reposition and easily track shifts in momentum. The title “Moving Average Convergence Divergence” justifies its starting point:
two moving averages converging and diverging. Its three basic parts are the MACD line and the signal line, with the third being the histogram, the difference between the two moving averages.
The MACD line is a result of subtracting the 26-day exponential moving average (EMA) from the 12-day EMA, while the signal line is just a 9-day EMA of the MACD line itself.
 Example Trades
Before going into the application, Colibri Trader uses two examples: a long trade in the DAX index and a short trade in GBPUSD. Analyzing those examples, the trader will understand why those decisions were made and how he interpreted MACD signals.
 Historical Background
MACD was developed in the 1970s by Gerald Appel and enhanced by Thomas Asprey in 1986 to add the histogram feature. With this feature, traders were able to predict possible MACD crossovers, or a lesser time between signals, which means faster results.
 Interpretation Techniques
There are three techniques that may be used to interpret the MACD:
1. Crossovers: A crossover is when the MACD line crosses above the signal line to give a bullish signal or below it to give a bearish signal. Quite many traders prefer waiting for confirmation of these crossovers rather than getting in too early.
2. Divergence: The event of divergence means that the price of a security is moving in the opposite direction to the MACD line, meaning that a reversal of the current trend is likely to occur at any time.
3. Steep Inverse: A high reading of MACD may indicate that the security is overbought, and then there could be a pullback.
 Use of MACD in Trading
The default parameters usually selected for MACD are as given below: fast moving average. Understanding the time parameters allows the trader to utilize the MACD for the right kind of short-term and intermediate trend analysis.
When to use MACD
MACD is very effective during trending markets, providing the trader with entry and exit points from a chart. Otherwise, in a range-bound or choppy market, it can produce false signals or “whipsaws,” which may incur losses.
 Complementary Indicators
Although MACD is powerful in itself, MACD is used effectively in conjunction with other technical indicators such as RSI, Bollinger Bands, and Stochastic Oscillator. These combinations of techniques help to confirm trading signals with a proper understanding of the situation of the market.
 Trading Strategies using MACD
The article brings out many important words, for example, “signal-line crossover” and “zero crossover”. Signal-line crossover is a point of potential purchase or selling opportunity while zero crossover is a point where the tendency to change direction is indicated.
Another thing which the trader must keep an eye on is divergence between the price and MACD, this suggests a reversal.
One of the most powerful tools in the arsenal of traders, who try to disentangle the market’s confusion, is the MACD.
This tool has found favor with even the beginners through its simple application and reliable signals and is competing highly within its sphere of activities with the other knowledgeable and experienced traders.
With full knowledge of how the MACD works and its integration into a complete trading system, traders improve their trends’ recognition skills and better decision-making.
To summarise, this is an article by Colibri Trader, which is a comprehensive guide explaining and illustrating the proper use of the MACD indicator.
