How to Read the MACD Indicator and Use It in Your Trading

28 Jun

Technical analysis is a vast field with thousands of indicators, which may be confusing to those among us who are just starting out. In this Idea, we look at one of the most popular indicators and also one of the easiest ones to fire up and start using from Day 1.

MACD (Moving Average Convergence Divergence)

MACD is arguably the most widely used indicator that can get slapped on virtually every chart out there. The indicator’s full name is Moving Average Convergence Divergence, but you don’t need to remember that.

If you need to take away one thing, it’s this: MACD is easy to read. Here’s how to do it.

Technical Side of Things

Add the MACD in your chart of choice — any chart, any time frame.
You’ll see three default numbers used to set it up — 12, 26, 9.

• The 12 is the moving average of the previous 12 bars (also called faster moving average).
  
• The 26 is the moving average of the previous 26 bars (also called slower moving average).
  
• The 9 is the moving average of the difference between the two averages in play.
  

Next, you see that there are two lines that move up and down and cross each other occasionally. The two lines are:

• The MACD line: the difference between the two moving averages and the “faster line”.
  
• The Signal line: the moving average of the MACD line and the “slower line”.
  

Because the two lines measure price changes at different speeds, the faster one (MACD) will always run ahead and react before the slower one (Signal) catches up.

How to Trade with MACD

If all that sounds a bit complex, here’s the gist of it:

• Faster line leads, slower line follows.
  
• Faster line crosses slower line to the downside — a downward trend may be forming.
  
• Faster line crosses slower line to the upside — an upward trend may be forming.
  

Technically, whenever a new trend is shaping up, the slower line should confirm it by following the faster line. And that happens when the two cross over. The way to potentially spot new trading opportunities is to look for the crossover.

This, in a nutshell, is how to read the MACD indicator and use it to help you become a more profitable trader. There's a whole plethora of MACD examples in action — dive right in!

Let us know your thoughts and experience with the MACD in the comments below!