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MACD

MACD

4 min reading

Find out what MACD is and how to use it on the bit4you platform in this article.

MACD

MACD

Today traders have a multitude of tools for technical analysis at their disposal – standard and original indicators. From the choice of an indicator or its complex, using which one can unambiguously interpret the character of price chart conduct, decide when it is better to enter the market and close positions, calculate their movement targets and loss fixing levels. All this is seen as a foundation for trading systems and strategies. Moreover, even in standard trading platforms there are effective indicators, such as MACD. For more information, read this article.

What is MACD?

The MACD is a type of oscillator and a technical analysis (TA) tool that traders use. The MACD stands for trend-following, utilising moving averages to detect the stock’s momentum, cryptocurrency or other exchange-traded asset. Before looking at how the MACD works, it is important to understand how moving averages work. A moving average (MA) is a simple line showing the average of the previous price within a particular period of time. When it comes to finance markets, moving averages (MAs) are one of the most general indicators for technical analysis. There are two different types of them: simple moving averages (SMA) and exponential moving averages (EMA). SMAs take into account all of the raw data equally, while EMAs make greater use of the most recent data (newer price points).

How does the MACD work?

To understand how MACD works, you will need a trading platform. Let’s explore it on our bit4you trading platform, using the demo mode initially. Even though the MACD is an oscillator, due to the fact that it has an average value of zero, it does not have any particular limit, as is the case with other oscillators (such as RSI and Stochastic). Because it has no upper or lower limits, you cannot use the MACD to show that the asset is outbought or outsold. Nevertheless, a MACD that is too high indicates a bearish trend and a MACD that is too low can indicate a bullish trend. There are three components to the MACD chart: the MACD line, the signal line and the histogram for the difference between them. For a simple example, a bullish signal emerges when the MACD line crosses the signal line upwards while a bearish signal emerges when the MACD line falls below the signal line. If you find the MACD line above the baseline it means the trend is up, and if it’s below zero it means the trend is down. If the MACD line crosses above the signal line, it is a signal to buy, while if it is below it, prices may start to fall. 

Before you start working with the indicator on the bit4you platform, you should pay special attention to the choice of parameters that will allow the analytical tool to function correctly. The MACD settings don’t require much effort. The indicator has 4 main parameters: period of a fast moving average; period of a slow moving average; period of a signal moving average; price value for the calculation. When trading on a downside, the MACD is normally set to a period of 26 for a slow moving average, 12 for a fast moving average and 9 for a signal moving average, and the price for the calculation is the value of the closing candle.

Formula

In calculating three exponential moving averages with unequal periods, we use three exponential moving averages. From the fast moving average with a smaller period (EMAs), a slow moving average with a larger period (EMAl) is subtracted. From these values the MACD line is drawn.

MACD = EMAs(P) – EMAl(P).

The periods given are 12 and 26. The resulting line is then aligned with the third exponential moving average (EMAa), usually with a period of 9, resulting in the so-called MACD signal line (Signal).

Signal = EMAa(EMAs(P) – EMAl(P)).

These two resulting curves form a normal linear MACD. Also in the indicator window there is often marked the zero line, concerning which the curves fluctuate.

History

The MACD, or moving average convergence/divergence indicator, is one of the most well-known and popular classics of technical analysis. Gerald Appel, prominent New York trading expert, developed it in 1979 in order to analyse the stock markets, and it has subsequently spread to other markets such as futures and currency markets. Gerald Appel is known as an author of many books such as “Winning Marker System: 83 Ways to Beat the Market”, “Stock Market Trading Systems” “New Directions in Technical Analysis” and others, as well as his own newsletter “Systems and Forecasts”.

However, despite everything, the MACD, as well as many TA indicators, is not completely accurate and is capable of giving many erroneous and false signals. Especially with volatile assets, poor tendencies or flat price movements. For this reason, most traders resort to applying the MACD along with other indicators, for example RSI, to reduce risk and later confirm signals.

Short Video ex: The Best Times to Use the MACD Indicator

Conclusions