MACD

MACD, which stands for Moving Average Convergence Divergence, is a technical analysis indicator that helps traders identify trends and potential momentum shifts in the price of an asset.

MACD indicator line flows on positive and negative direction.

When the MACD line is positive, it indicates that the short-term moving average is above the long-term moving average, which suggests that the price is trending upwards.

When the MACD line is negative, it indicates that the short-term moving average is below the long-term moving average, which suggests that the price is trending downwards.

Components of MACD indicator:

The MACD line:It is the difference between two exponential moving averages (EMA) of different periods, usually 12 and 26.
The Signal line: It is the 9-period moving average of the MACD line.
The Central line: It is the zero reference line of MACD.
The Histogram: It is the difference between the MACD line and the Signal line, and it provides a visual representation of the distance between the MACD line and the Signal line.

How to use MACD?
- There are multiple ways to use the MACD. Below are the few examples.

MACD Crossover Strategy

The MACD Crossover Strategy is a popular trading strategy that uses the crossover of the MACD line and signal line to generate buy and sell signals.

Based on crossover, there are 2 types:

1. Bullish Crossover:

When the MACD line is below Zero level and crosses Signal line, this indicating that the market may soon be turning bullish.
- Check the MACD Histograms and make sure they are making higher lows, indicating an uptrend.
- Look for the MACD line to cross above the signal line, which is a buy signal.
- Set a target for the trade until the MACD line crosses below the signal line.
- Determine a stop loss using a trend line or the lowest price of the previous candles.
2. Bearish Crossover:

When the MACD line is above Zero level and crosses below the Signal line, this indicating that the market may soon be turning Bearish.
- Check the MACD Histograms and make sure they are making Lower lows, indicating an uptrend.
- Look for the MACD line to cross below the signal line, which is a sell signal.
- Set a target for the trade until the MACD line crosses above the signal line.
- Determine a stop loss using a trend line or the highest price of the previous candles.
Note: The MACD Crossover strategy, while popular, often fails to perform well in various market conditions and tends to produce inaccurate signals. However, it can still be used effectively as a tool to find market momentum.
MACD Divergence Strategy

The MACD Divergence Strategy is a trading strategy that uses divergences between the MACD indicator and price action to identify potential trend reversals.

1. Bullish Divergence:

Occurs when the price is on a downtrend but the MACD histogram is showing uptrend, signaling a potential bullish reversal.
- Check that the price is making lower lows, indicating a downtrend.
- Check that the MACD Histograms are making higher lows, indicating an uptrend.
- Look for the MACD line to cross above the signal line, which confirms buy signal.
- Target can be set till MACD line crosses below signal line.
- Stop loss can be set by Trend line or Lowest price of the previous candles.
2. Bearish Divergence:

Occurs when the price is on a uptrend but the MACD histogram is showing downtrend, signaling a potential bearish reversal.
- Check that the price is making higher highs, indicating an uptrend.
- Check that the MACD Histograms are making lower lows, indicating a downtrend.
- Look for the MACD line to cross below the signal line, which confirms Sell signal.
- Target can be set till MACD line crosses above signal line.
- Stop loss can be set by Trend line or Highest price of the previous candles.

Pros of MACD

Represents the trend in the market, making it easier to identify potential entry and exit points.

Shows strength of the market trend and momentum of the market

Shows over brought and over sold areas

Can determine the reversal of the trend

Works good in volatile and high momentum market

Cons of MACD

Lots of false signals

Its a lag indicator. Signal can obtain after price action. Opportunities can be missed

Need another indicator for the proper entry of the signal

Does not suitable for sideways market

Below image shows the Failure of Bullish MACD crossover

Example-1 : Regular Divergence

Example- : Hidden Divergence

Example- : Market drops as Regular Bearish Divergence occurred.

Example- : Do not trade on every Crossover. Not all Crossovers are Buy and Sell Signals. This resembles a Bad Trade. Always enter Trade with multiple confirmation like using other Technical Indicators or Price Action.

MACD Crossover Strategy

MACD Divergence Strategy

Example-1 : Regular Divergence

Example- : Hidden Divergence

Example- : Market drops as Regular Bearish Divergence occurred.

Example- : Do not trade on every Crossover. Not all Crossovers are Buy and Sell Signals. This resembles a Bad Trade. Always enter Trade with multiple confirmation like using other Technical Indicators or Price Action.

Example- : Analyzing MACD crossover

Example- : MACD Bearish Divergence, Price going up but Histogram falling down. This drags price downward.

Example- : MACD Bullish Divergence, Price falling down while Histogram going up. This drags price upward.

Example- : Bearish MACD Divergence

Example- : Bullish MACD Divergence

Example- : MACD Crossover Analysis

Example- : Failure of MACD Crossover in Strong Bearish Market.

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