The MACD, along with the Moving Average, is one of the main indicators of technical analysis that is actively used by traders of any level. In fact, it is a combination of 2 moving averages, complemented by a histogram that clearly shows the order in which lines are built and the distance between them. Using the tool, you can find reversal points, recognize market divergence, and determine the intensity of trend movement. So, let’s conduct a detailed review of the MACD.
Development history
The name MACD is an abbreviation, which stands for “moving average convergence divergence.” The indicator was created by Gerald Appel in the early 80s. He was a successful trader on the stock exchange, but later switched to forex, finding it more promising. Gerald did not create any innovative calculation formula, he took a ready-made solution in the form of the Moving Average as the basis. However, the uniqueness of the solution lies in its simplicity and simultaneous effectiveness.
The use of two lines of Moving Averages with a certain difference in period allows you to effectively recognize reversal points on the market. Different signal durations lead to one line reacting to price fluctuations faster than the other. This leads to a discrepancy between the curves.
Indicator settings
There are many varieties of MACD. If you conduct a keyword search in the catalogs of professional platforms for technical analysis (for example, TradingView), the results will produce more than a hundred items. The general principle of action is the same for all of them, with the exception of some modifications. In this review, we will look at the classic version of MACD, which is available in the Binomo platform’s catalog. It has 2 lines and a two-color bar histogram.
The standard period of the fast line is 12, the slow period is 26, and the signal is 9. An increase in the first parameter reduces the sensitivity of the white curve, the second parameter affects the behavior of the red MA. The signal value determines the cumulative amplitude of oscillations. Increasing this parameter increases the distance between the fast and the slow Moving Average. This makes the signals more noticeable for visual discernment in conditions of low market volatility.
The default settings are optimal for trading in most cases. They are compatible with any time frame. An increase in the period will be justified in cases when relatively long-term trading is being conducted (expirations of more than 10 candles on the chart). This makes the signals more accurate, but increases their delay. Therefore, the use of long-term MACD will be justified only with a long trade duration. Binomo allows you to implement such schemes on a time frame of 5 seconds and contract expiration of 1-5 minutes.
Using MACD in market analysis
MACD is often called a trend oscillator. This is not entirely correct from a technical point of view, but in practical terms, it makes sense. It is a trend indicator, but it can nevertheless be used to find effective entry points to the market even for short-term trading. There is a visual similarity to the Stochastic which also has 2 lines – fast and slow.
Indicator signals:
- the intersection of lines is the point of contact between the slow and fast Moving Averages with a subsequent change in the order of building
- convergence and divergence are the change in the distance between MA, displayed on the histogram;
- the intersection of the N/A border is the intersection point of the fast and slow MA with a neutral border;
- divergence is when the market moves in one direction and the indicator in the opposite direction.
The main signal is the intersection of the curves and their position relative to the neutral border. There is a lot of similarity here with oscillators. The MACD also allows you to effectively recognize overbought and oversold periods of the market.
The phenomenon of divergence is almost impossible to detect on a clean chart with the naked eye. But when using auxiliary tools it is very simple. Divergence is the multidirectional movement of the market and indicator. A typical example can be seen in the illustration above. In such a situation, you should trust the values of the Moving Averages rather than those of the chart.
Conclusion
In conclusion, we will review the most popular and effective means of using the MACD. The main signal is the intersection of Moving Averages. But each signal is filtered with respect to overbought and oversold markets. It is permissible to trade on a raise only when the market is oversold, i.e. located in the lower half of the window (below the N/A border). For trades on a fall, the situation is reversed.
