What is the MACD (Moving Average of Convergence and Divergence)?
Of all the trading indicators, this is, perhaps, the most used and known, with permission of the moving averages, of course, from which it takes part of its “being”.
This indicator was created by one of the gurus of the Technical Analysis of yesteryear, Gerald Appel.
Countless people use this indicator for any type of trading you can imagine, be it Forex, futures, CFDs, stocks or cryptocurrencies; and it is supposed that its greater utility is to find market trends although it appears in the section of oscillators, so in theory this is an indicator to find those oscillations in the form of a kind of sling around a central line, in the case of the MACD, the line that marks the zero in the histogram.
Now, this is where the confusion begins, because if in theory it is an indicator that makes it easier to find trends, the problem is that in markets with strong trend movements of a secular type (Apple, Nasdaq, Inditex, Bitocin, etc.) ) will give us many false signals contrary to this main trend, so in these markets it is better to use the indicator in favour of this trend.
If you have noticed, when you use the indicator you will get a bracket with values that depending on one or the other broker will look one way or another but should always have the same design that would be the following: (Fastlenght, SlowLength, Source, SignalLength) and that in a typical example, as it is configured in many graphics would be something like (12, 26, close, 9)
The first component is the difference between the two named mobile differences (Fast and Slow) that would be the difference between the average fast and the slow average, in the previous case 12 and 26.
12 would be the fast average because it belongs to a period of twelve bars and therefore is more sensitive to short-term price changes.
26 would be the slow average, since it belongs to a longer period and, therefore, is much softer and less sensitive to price movements in the short term.
That first component, called MACD, as the indicator is called, is the difference between the averages of both moving averages.
The second component is the Signal and as the name indicates it helps us to indicate the ideal moments of purchase or sale, according to our system.
This line would be the exponential moving average (EMA, Exponential Moving Average) of 9 periods (for the example).
It is assumed that when the MACD line crosses over that of the Signal we would have a bullish signal.
The third component is the Histogram, which are the bars that we have to determine in another way if we find ourselves with a bull market or a bear market.
For example, if we see that these bars are above the horizontal line, it is because the MACD is greater than the Signal. That is, the histogram is the result of subtracting the MACD signal, so when the signal is above the MACD we have a negative value and, therefore, below the line.
MACD components: MACD, Signal and Histogram
Therefore, as a summary:
- MACD would be the line that would mark us the “bullish” part, usually the blue
- Signal would be the line that would mark the “bearish” part, normally the red
- The Histogram is the subtraction between MACD and Signal.
- When the MACD cuts above the Signal it is a “sell” signal
- When the MACD cuts below the Signal it is a “buy” signal
- When the Histogram crosses above the value 0 is a “sell” signal
- When the Histogram crosses below the value 0 is a “buy” signal
It is done.
As you can see, the MACD does not have much science and results from applying a series of means and subtractions and applying them to a price chart.
Then all you have to do is configure it on your favourite platform, since it is on all the graphic platforms of the world, from MetaTrader 4 to NinjaTrader, through Tradingview or Prorealtime.
Of course, do not think you’re going to win by just starting to apply the operations in the crossings of this example because you’ll probably get an important scare in no time.
Is not the MACD supposed to be an indicator to make us earn money with trading?
Yes and no.
You can use the MACD to make a more sensible trading but the vast majority that use it will end up ruined, regardless of the stories they make.
The trick is to make smarter trading and this means longer term trading.
If you want to trade very short term then I’m afraid you will not last long.
Well, how to configure the MACD then?
What are the perfect values to earn a lot of money with the MACD?
In what time horizon will it work best for me?
How do I have to operate, what benefits and losses should I take?
All these questions and many more make each and every one of the systems using the MACD different.
For example, you can play with the values and change them, from 12 to 24 and from 26 to 60, respectively, or change the signal to 20, or a billion more combinations.
Configure the MACD in intraday
More than that, I would tell you to focus on something else. In a method to negotiate efficiently; and for this the best thing is to do what I said before: run away from the short term, (known as day trading by many).
If you are able to do that you have already taken a big step to be able to use the MACD in a more efficient way, such as swing trading or trend trading in a more “quiet” way, if we can call it that way the frenetic stock markets.
Many people would make you believe that there are ways to configure the MACD to make effective day trading and become a “professional trading”.
I’m sorry to tell you that the vast majority of these “professionals” do not make a living doing day trading, and do not even make long-term money with that.
Automate the MACD
A very good way to test if this indicator works in day trading, or any trading in reality, is to try to automate the process to get an idea of what you can get with this system.
Ideally you would program the system yourself and put it to work on your platform preferably in demonstration or simulation mode to see how it behaves with a historical data set.
This, however, is not a panacea because automatic trading tests always tend to give better results than when they are passed to reality. The associated problems are many and I have already mentioned them on many occasions. Basically the actual trading conditions vary quite a lot from the simulated ones.
Anyway you do not need to learn for this because we can also see many systems based on the MACD for the Metatrader 4 that we can find on the web of mql or if you search in google “robot macd metatader 4”. Sure you find many and if you want you can even mess with them adding your own variations.
How to use the MACD?
In the first place, we have to go back to the initial concept and realize that this is a trend indicator, so ideally we should look for those assets with stronger tendencies, but as I said, those assets should be operated only with the upward signals of the MACD.
What are those assets?
Well, those who have a more clear long-term movement.
In the short term these “trend” movements have a more random component that makes us fall into the trap of trying to guess the “short-term trends” over and over again without much success.
In the medium or long term, we can find trend movements in a less random way, with something more “ground” if I am allowed to express myself.
It is in those cases where we should look for the entries with the MACD to try to maximize our trading opportunities.
For example, we can find many of these instruments in stock markets, with values such as Amazon, Apple, Inditex.
We can also find interesting values in markets such as cryptocurrencies, commodities and even Forex, although in this case things can get much more complicated, although we can always apply some technique to avoid serious errors.
The second case of how to use the MACD is when we have assets in lateral markets.
It makes more sense to apply both the purchase signals and the sales signals of this oscillator.
However, in my opinion I prefer to use the indicator in the case of the first example.
Example of how the MACD works
We are looking for one of the most bullish market values.
One of those bullish assets of the last 15 years is Apple.
Well, I decide to use the chart of daily bars to trade.
I decide that I am going to operate only upwards because I am not interested in using the MACD downwards in an asset that has gone up 17 years of 20 (to say the least).
In this case I will only make entries when the Apple MACD line crosses the Signal line after a more or less significant correction in the histogram or with a “small bear market” in the lines.
From April 2017 to June 2018 I find six occasions in which to apply this kind of operation.
If I choose a ratio of gains and losses of 2: 1 (because I am in a bull market I am interested in earning more when I am successful) with 10 dollars of stop loss and 20 of profit taking.
As we can see, I have had 4 winning operations and 2 losers.
In this case we would have a good profit; but of course, we are talking about Apple, one of the best securities to operate on the upside of recent years.
Different thing would have gone if we had chosen the EURUSD or the GBPUSD, for example.
Imagine, in addition, that you had chosen to operate by putting yourself short.
What would have happened?
Well, you would have lost more operations. At least in Apple in that time horizon.
Anyway, this is not a very typical example of how this trading indicator is used.
The most typical examples are going to be found in the Forex, with bars of 15 minutes or 1 hour and trying to do many operations a day.
Also, as many people have “realized” that they cannot win by simply applying the MACD they try to add other indicators to the soup, hoping to bring that mathematical hope that seems so elusive.
My opinion is that it is an acceptable indicator and that it can be useful if it is applied with good trading principles in longer periods of time, for example with 4 hours, 1 day or even 1 week or 1 month candles.
Now, as I said at the beginning of the article, this indicator presents serious problems when we find side markets. The fact is that there are many side markets on the stock market.
Not to learn what the same is and apply some numbers intuitively you will be able to master the world of trading, much less that of short-term trading.
For this you will have to apply more advanced techniques and the classic axioms of trading and investment.
Regards and good trading.
Origintal article: Trading con el MACD