Moving Average Convergence Divergence (MACD) is a trend-following indicator used to measure the momentum of the financial market.
MACD also shows the relationship between two moving averages of the underlying asset.
How is the MACD indicator calculated?
Before that, you might be wondering why you need all these calculations.
The truth is, you don’t need to know how an indicator is calculated. So why am I boring you with it anyway?
Because you will need an understanding of it later when making adjustments to the MACD settings.
That said, let’s get right to it.
You get the MACD by subtracting the 26-period exponential moving average from the 12-period exponential moving average.
12-period EMA – 26-period EMA = MACD
Now, let me break it down for you.
- The exponential moving average (EMA) is a type of moving average that puts more emphasis on the most recent market data points.
- 12-period EMA is the short-term EMA in this case.
- And 26-period EMA is the longer-term EMA.
The result of this calculation is the MACD line.
Now, MACD is made up of 3 components:
- The signal line (9-period EMA) which is commonly plotted on top of the MACD line. Pro traders use it as a trigger for buy and sell signals.
- Histogram – these are graphs showing the distance between the MACD and its signal line.
- MACD line itself – comes from subtracting the longer-term EMA from the shorter-term EMA.
Let’s now dive deeper into understanding what the MACD indicator is capable of as a technical indicator of Expert Option.
Understanding the MACD Indicator.
As a trader on Expert Option, your top priority always is being able to identify a trend.
It is because that is where most traders make money.
And that’s where the MACD indicator comes in. It helps you identify market trends, whether bullish or bearish.
When you look at the MACD settings, you will notice the presence of three numbers. Here is what they all represent:
- The first one represents the number to be used to calculate the fast moving average.
- While the second represents the period number to be used to calculate the slow moving average.
- As for the third, it represents the number of bars used to calculate the moving average of the difference between the fast and slow MAs.
Look at the following example:
If you are seeing these numbers, ’12, 26, 9’ as the MACD settings, (since these are the default parameters of the MACD in most software including the Expert Option), this is what they all mean:
- 12 for the previous 12 bars of the fast-moving average.
- 26 to show the 26 previous bars of the slower MA.
- Lastly, 9 to represent 9 previous bars of the difference between the fast MA and the slow MA. This is shown on the chart as vertical bars or histogram.
That should help you better grasp the MACD indicator’s settings.
Moving on, here are some of the popular MACD terms.
What is MACD Divergence?
MACD divergence occurs when the two moving average lines seem to fall while the prices on the chart are rising.
What is MACD convergence?
This is the opposite of MACD divergence.
Happens when the two moving average lines seem to rise while prices on the chart are falling.
Considering what you just learned, let me show you how to add the MACD indicator to your trading chart on Expert Option. After adding the indicator, you will be ready for what’s coming next. How to read signals on MACD.
How to add the MACD indicator on Expert Option.
Adding the MACD on Expert Option is easy, that is if you’ve been using other indicators to trade.
But either way, follow these steps below to add this indicator on your chart:
- Make sure you are logged in to your Expert Option trading account.
- Locate the Indicators feature on the top-right corner of your screen and click on it.
- On the indicators window, select the MACD, right on the bottom and you will see the settings window.
- I recommend you leave the settings as they are. But if you feel like adjusting some things, go ahead.
- Once you are satisfied, click on Apply to finish.
It is so simple, right?
Once you have added the MACD indicator to your trading chart, it is time to study it and generate tradable signals.
To help you out, here are some of the best MACD trading strategies:
Best MACD trading strategies you should try right now.
After looking at these strategies, you will learn how to trade the MACD indicator on Expert Option.
Considering the MACD has two moving averages moving at different speeds, it means that the faster MA is sensitive to price action than the slower MA.
As a result, when a new trend is formed, the faster MA is the first to react, consequently, crossing the slower line (the signal line). When this happens, it is known as a crossover.
During crossovers, the faster line moves away (diverges) from the slow line. Traders interpret this as the formation of a new trend.
There are two types of crossovers:
- Bearish crossover – when the MACD line crosses the signal line and continue moving down (sell signal).
- Bullish crossover – occurs when the MACD line crosses the signal line from below and continues moving upwards (buy signal).
The MACD Divergence.
As we’ve already discussed, this comes about when the MACD diverges away from its price line.
Likewise, the divergence is of two types:
- Bullish divergence – appears when the MACD registers two high lows while the price line has two dipping lows.
- Bearish divergence – when the MACD line shows a series of two dipping highs relative to two surging highs of the price.
Rapid rising and falling of the MACD.
When the shorter moving average diverges away from the longer moving average, it indicates that the underlying asset is either overbought or oversold. Therefore, a correction is looming.
The asset prices at some point will return to its normal levels.
With all that you have learned about the MACD indicator on Expert Option, get the ball rolling and start practicing.