21. How to Trade the MACD Indicator Like a Pro Part 2

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The second lesson of two on how to trade the moving average convergence divergence (MACD) for day traders and investors using technical analysis in the stock market, futures market, and forex market.

The link that I reference in my video is here: http://www.informedtrades.com/tags/index.php/macd/

In addition to being able to tell if the stock, futures contract, or currency you are analyzing is trending or not from simply looking at its price action on the chart, you can also use the MACD indicator. Very simply if the MACD line is at or close to the zero line, this indicates that the financial instrument you are analyzing is not exhibiting strong trending characteristics, and thus should not be traded using the MACD.

Example of Trending and Non Trending Markets

Once it is determined that the financial instrument you are analyzing is exhibiting trending characteristics, there are three ways that you can trade the MACD.

1. Positive and Negative Divergence
2. The MACD/Signal Line Crossover
3. The zero line crossover

Trading the MACD Divergence:

Divergence occurs when the direction of the MACD is not moving in the same direction of the financial instrument you are analyzing. This can be seen as an indication that the upward or downward momentum in the market is failing. Traders will thus look to trade the reversal of the trend and consider this signal particularly strong when the market is making a new high or low and the MACD is not.




Example of Negative Divergence:


Trading the MACD/Signal Crossover:

This is the simplest way to trade the MACD as it involves simply watching the MACD line and going long when the MACD line crosses above the signal line and going short when the MACD line crosses below the signal line. As this strategy generates the most signals, it also generates the most false signals, and the potential to get into a bad trade using just this method is high. For this reason traders will confirm the signals with other methods such as the chart patterns we have learned so far, volume etc.

Example of Using the MACD Crossover as Buy and Sell Signals

The MACD Zero Line Crossover:

The MACD zero line cross over occurs when the MACD crosses above or below the line plotted at point zero on the indicator. When this occurs it is an indication that market momentum has reversed direction. The strength of the move that can be expected as a result of this depends on what has been happening in the market, and what has been happening with the indicator. If the market and the MACD are both coming off of recent new highs then this could be considered a strong signal. If the market is simply trading in a weak trend or range and the MACD has simply crossed from just above to just below the zero line, then this would be considered a weak signal.

Example of a Bullish and Bearish Signal Line Cross:


As with all of the indicators that we are learning about in this series it is normally better to trade the MACD along with other confirming signals such some of the things we have learned so far like trend lines, chart patterns, and breaks of significant support resistance levels.

That completes our lesson for today. You should now have a good understanding of the MACD and situations where it helps traders predict future price action and how it can be used to place trades.

As always I encourage your questions and comments so please leave them in the comments section below, and have a great day!

Category:

Howto & Style

Tags:

• trade
• invest
• howto
• forexmarket
• stockmarket
• futuresmarket
• technicalanalysis
• MACD
• informedtrades

[mybestcollection]

This is one of the best free video i have ever seen on macd. Great work keep it up.

I got a question can we use divergence of macd histogram to know that trend is changing.

[InformedTrades]

Thanks for the comment and for watching I am glad you like the video. Many people like the Divergence of the MACD histogram to give them an indication that the trend is changing, however keep in mind that nothing is 100%. Best Regards, Dave

[IchigoMe]

Firstly thanks for these videos, I've just started learning about technical analysis and am going to trade forex when I feel comfortable with my progress.

You mention the MACD giving bad signals, what other types of indicator are good to use with MACD for confirmation?

Thanks.

[InformedTrades]

my pleasure glad you liked it. I like to use multi timeframe analysis to identify support and resistance in the market and using this in conjunction with indicators such as the MACD. Best Regards, Dave

[learntoprofit0co0uk]

Another amazing video. Every video of yours gets me that bit more excited as it all makes sence that bit more. I cannot thank you enough for the time and effort you are sharing with others. Respect mate.

[InformedTrades]

Hi learntoprofit0co0uk, Thanks for the kind words and for watching I am glad you are enjoying the videos. Best Regards, Dave

[ghahandi]

MACD, like a lot of oscillators shouldn't be used alone. Bottom line. Price is gonna do what price is gonna do. In this video, you'll notice that the MACD showed divergence after divergence after divergence after it's bull run. It was great for taking out a long trade, and maybe reentering the swings. But to to try to fade those divergences would have killed your capital. They are lagging indicators based on the past, after all.

[johnmoldova5]

forex-bussines.do.am this site gives good signals

[saweaq1]

great video

[geglockn]

What is the proper span of time to set for charting the MACD? I have noticed it can look quite different when charted for 1 year vs 2 days. Cross-overs can be shown in a one or two day span, but be far from crossing over when charted over a span of a week or longer. Can you explain this and recommend a time span to use. I am just learning how charting works, but have found your explanations to be some of the very best. Thank you.

[hcentman]

Hi, I was wondering what are some good computer programs used for technical analysis of stocks,perhaps which one do you use? I'm totally open to suggestions.

Thanks man.

[Colombianit0]

Hi Dave, firstly thanks for you wonderfull vids hthey are very usefull and simple to understand i wanted to ask you why does the bloomberg page uses three lines in its MACD is there anyway to use those three lines in conjuction?

[2330Bossert]

David, you are doing us all great service with your instructions. Your presentations are very clear and helpful.

Eric, Kamloops, BC

[kubek555]

easy to draw into chart, try show something in realtime when market is moving

[freeSCALPINGindicato]

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