How to Use the MACD Indicator


MACD is an abbreviation for Moving Average Convergence Divergence. This tool is used to recognize moving averages that are representing a new movement, whether it’s bullish or bearish. Our utmost significance in trading is being able to find a trend, because that is where the most money is made.


With an MACD chart, you will usually see three numbers that are used for its settings.
·       The first is the number of periods that is used to calculate the faster-moving average.
·       The second is the number of periods that is used in the slower moving average.
·       And the third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.

How to Trade Using MACD
Because there are two moving averages with dissimilar “speeds”, the faster one will noticeably be faster to react to price movement than the slower one. When a new trend ensues, the fast line will react first and eventually cross the slower line. When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often designates that a new movement has formed.
The fast line crossed under the slow line and properly identified a new downtrend. This is because the difference between the lines at the time of the cross is 0. As the downtrend begins and the fast line deviates away from the slow line, the histogram gets bigger, which is good indication of a strong trend. There is one drawback to MACD. Naturally, moving averages tend to lag behind price. After all, it’s just an average of historical prices.

Since the MACD signifies moving averages of other moving averages and is smoothed out by another moving average, you can imagine that there is quite a bit of lag. However, MACD is still one of the most favoured tools by many traders.






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