How to read MACD and how to trade effectively is a topic of interest for many traders. The MACD line is a fairly common and easy-to-use indicator. Therefore, if you know how to read and trade correctly, you will find more favorable buying or selling opportunities. This article will show you how to read the MACD line and trade with it effectively for beginners.
What is the MACD indicator?
The MACD indicator is a momentum indicator in technical analysis that shows the strength of the trend. The MACD indicator consists of 4 components:
- MACD line: commonly known as fast line (blue). MACD formula: MACD line = EMA 12 – EMA 26
- Signal line: Often called a slow (orange) line. Signal Formula: Signal Line = EMA 9 of MACD
- Histogram: bar chart (blue when positive, red when negative). Calculation formula: Histogram = MACD Line – Signal Line
- Zero Line: horizontal axis to refer to signal lines and histograms
How to enable the indicator to read the MACD signal on the histogram
To view charts, traders often use Tradingview. Follow the instructions below:
Step 1: Visit the Tradingview homepage here, then click “Chart” on the homepage
Step 2: Click the box on the left corner of your screen to find the stock ticker, cryptocurrency or forex pair you want to see the chart.
Step 3: On the histogram toolbar, click on the Fx symbol, select Built-ins and select MACD.
This allows the default MACD indicator to be enabled on the chart you want to display.
Some traders often find more optimal cyclical parameters for the MACD indicator. However, when applied correctly, we think that using the default MACD is also very effective without using any other parameters.
How to read MACD and trade with MACD effectively.
How to read the MACD line that crosses the signal line
How to read MACD is quite simple:
- When the MACD line crosses the signal line from below, it signals an upward trend.
- When the MACD line crosses the signal line from above, it signals the end of the upward trend, possibly veering towards a downward trend.
Therefore, the way to trade purchase orders is as follows:
- Place a purchase order as soon as the MACD line crosses the signal line from below.
- Place the stop loss at the nearest bottom.
- Take advantage as soon as the MACD line crosses the signal line from above.
Instead, with a sales order, do the following:
- Place a sell order as soon as the MACD line crosses the signal line from above
- Place the stop loss right at the nearest top
- Take advantage when the MACD line crosses the signal line from below
Above is the easiest way to read and trade with MACD. However, if trading is so simple, 100% of the market participants win. Of course, this does not happen. The market is always volatile and nothing will be 100% correct in the future. Therefore, many professional traders often combine other trading methods with the MACD indicator.
Use the MACD indicator and combine trading over multiple time frames
Combining multiple time frames can help you avoid some false signals when using the normal MACD trading method. Proceed as follows:
Step 1: Identify the trend over a large amount of time (for example, D1).
Step 2: Switch to the small amount of time, based on the MACD crossover, to find an entry point in the same direction as the large time frame.
How to enter a purchase order by combining the MACD indicator and 2 time intervals, D1 and H1 :
- The D1 time period is increasing
- Switch to the H1 time interval, place a purchase order at the point where the MACD line crosses the signal line from below.
Similarly, how to enter a sales order by combining the MACD indicator and 2 time intervals, D1 and H1:
- The D1 time frame is on a downward trend.
- Switch to the H1 time range, place a sell order at the point where the MACD line crosses the signal line from above.
Use MACD divergence and convergence for trade.
The MACD divergence means that the price trend and the performance of the MACD indicator go in opposite directions. It is a signal that the price trend is coming to an end and the price can move in the direction of the MACD when the MACD line crosses the signal line.
- The price trend is in an upward trend (the latter high is higher than the previous high), but the MACD is a downward trend. The price may be about to turn towards a downtrend after the MACD line has gone through the bearish signal.
- Or the price trend is in a downward trend (the latter is lower than the previous one), but the MACD is in an upward trend. The price may be about to rise after the MACD line crosses the signal.
Combine MACD with inverted candlestick model for trade
Traders often combine the MACD indicator with reversal candles to improve trading efficiency to confirm signals before placing orders.
- When a bear is long, if reversal candles appear, MACD forms a bullish divergence. This is a buy signal.
- If after a long rise, reversal candles appear. Meanwhile, macd has formed a bearish divergence. This is a signal to place a sell order.
Combine MACD with other indicators to confirm trading signals
Technical indicators have perfect accuracy, especially when combining both indicators to confirm the same signal. If 2 indicators give the same signal, the trading signal has a very high probability of success.
Above is a guide on how to read macd and trade effectively with MACD from the basis to a combination of other technical analysis methods. The trading signals from the MACD indicator are viral, easy to use and trusted by many traders. However, as with any other trading signal, the signals are always probabilistic. Therefore, it is necessary to combine the MACD indicator with other signals to confirm the trade.