The formula below breaks down the varying components of the MACD to make it comfortable for traders to apply.

As mentioned previously, the MACD histogram plots the difference between the two moving average lines. The histogram fluctuates in and around the zero designation on the MACD indicator. When the MACD line is above the signal line, then the histogram will be positive.

The opposite is true when the MACD line sits below the signal, whereby the histogram will plot below the zero as a negative value. The MACD indicator is considered to work best in trending markets. This limits its use for traders depending on their trading strategies. Traders will need to truly understand the MACD as well as when to employ the indicator for optimal use.

Novice traders may find this indicator difficult to use initially, which is why going through basic moving average and EMA fundamentals will benefit traders who are looking to make use of the MACD indicator. The variations that can be implemented with the MACD indicator is almost infinite which makes it very personal to the trader. This subjective nature of the MACD will mean that results differ from trader to trader which take away any consistency.

Traders will need to follow a basic outline when using the MACD:. This dual purpose gives two signals in one indicator allowing for a less cluttered chart. Traders may find this useful which makes understanding the MACD worthwhile. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors.

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By pressing 'Subscribe' you consent to receive newsletters which may contain promotional content. Check your email for further instructions. Live Webinar Live Webinar Events 0. Economic Calendar Economic Calendar Events 0. Many traders use this indicator differently, they all consider different factors, let's see how traders use this indicator. There are 4 most common ways by which traders use this indicator.

When the MACD lines move above the baseline traders see it as a bullish trend. And when the MACD lines move below the baseline traders view it as a bearish trend. Traders believe that the baseline to be the line that differentiates between the dominance of buyers and sellers. When the MACD line moves or is above the Baseline, it suggests that the dominance of buyers is more than that of the sellers. And when the MACD line moves or is below the baseline, it suggests that the dominance of sellers is more than that of the buyers.

Like in the above image you can see, when the market was up trending the MACD line was continuously above the baseline, indicating buyer's dominance in the market. In this image when the market was down-trending, the MACD line moved below the baseline and it stayed continuously below the trend-line until the trend changed. When both the lines, that is the MACD line and the signal line is far below the baseline and when the MACD line crosses the signal line and moves above it, traders take it as a buy signal and enters a buy trade.

Like you can see in the above image, when the MACD line crossed the signal line and moved above it, the price started moving up.

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In the same way, when both the lines, that is the MACD line and the signal line is far above the baseline and when the MACD line crosses the signal line and moves below it, traders take it as a sell signal and enters a sell trade. Here the macd line crossed the signal line and moved below it, and at the same time price started moving down. Like, in the above image, when both the lines, that is the MACD line and the signal line is far below the baseline and when the MACD line crosses the signal line and moves above it, traders look for the histogram to move above the baseline and form green bars and then consider it as a buy signal and enters a buy trade.

Like in this case, here we can see that the MACD line and signal line crossover happened and at the same time the histogram turned green, and the price started moving up. So, the traders first look for crossover and then wait for the green bar to form above the baseline and then enter the buy trade.

In the same way, when both the lines, that is the MACD line and the signal line is far above the baseline and when the MACD line crosses the signal line and moves below it, traders look for the histogram to move below the baseline and form red bars and then consider it as a sell signal and enters a sell trade. Here we can see that the MACD line and signal line crossover happened and at the same time the histogram turned red, and the price started moving down. So, here the traders first look for crossover and then wait for the red bar to form below the baseline and then enter the sell trade.

Traders use a MACD divergence to spot the reversals and crossover signals for confirming the reversal. The traders first spot divergence using the MACD line and signal line and then wait for the two lines to crossover. Now, let us try to understand how do traders trade using this technique. As you can see in the above image, the price created a higher high, but the indicator created a lower high giving us a divergence signal. So, traders often spot a divergence like this and then enter the trade after the crossover happens. As you can see after the divergence and crossover the price started to move down and hence gave a perfect reversal.

These are the most common ways by which traders trade using this indicator. As the market moves, moving averages move with it, widening diverging when the market is trending and moving closer converging when the market is slowing down and possibility of a trend change arise. Standard indicator settings for MACD 12, 26, 9 are used in many trading systems, and these are the setting that MACD developer Gerald Appel has found to be the most suitable for both faster and slower moving markets.

These custom MACD settings will make indicator signal faster, however, the rate of false signals is going to increase. As a result a momentum oscillator is created that oscillates above and below zero and has no lower or upper limits. MACD also has a Trigger line. Calculate the days EMA of closing price 2. Calculate the days EMA of closing price 3. Divergence is found by comparing price shifts on the chart and MACD values.

Components of the MACD

For example, while Sellers may seem to be dominating the market at the moment and price continues to trend down, there already might be signals for an overall weakening of Sellers power. This key warning moments can be observed with MACD indicator.

What Forex traders would see is that despite price making new Lower Lows, MACD doesn't confirm that and instead registers a Higher Low, signaling that Sellers are running out of steam and a trend change is on its way. When MACD line on our screenshot it is a blue line crosses Signal line red dotted line - we have a point top or bottom to evaluate.

Evaluate the lines received, as shown on the larger screenshot click on the small picture to enlarge. Another entry strategy is to find 2 most recent swings high or low on the chart and draw a trend line trough them; and then set an Entry order on the breakout of that trend line. MACD divergence trading method used not only to predict trend turning points, but also for trend confirmation.

I noticed you look at MACD line to identify divergence. I learned earlier that traders also look at MACD histogram to trade divergence. Could you please explain the difference. Yes, that is correct. We use MACD line. Many traders nowadays use MetaTrader 4 platform. That is why some traders are saying that they are looking at MACD histogram to trade divergence Could be of use to some traders looking to learn basic principles of MACD trading.

Try trading higher time frames. You cold be making a mistake common among traders: they set distant profit targets while trading small time frames. With small time frames your targets should be small. Also when you trade with indicators, you should realise that majority of them lag, give delayed signals.