What is the MACD indicator and how can it help you enter the market?
A tool that helps you pinpoint the perfect moment to jump into a trade? That’s exactly what the MACD indicator does. In this article, we’ll show you how to use it.
Timing your market entry is crucial in trading. Even the most experienced traders take this part of their strategy seriously. So why not give it some attention in today’s article?
What is the MACD (Moving Average Convergence/Divergence) indicator?
The MACD (Moving Average Convergence/Divergence) indicator was created in 1979 by analyst Gerard Appel. As the name suggests, this oscillator examines the convergence and divergence of moving averages. To be more specific, it measures the difference between a long-term and a short-term exponential moving average.
The MACD indicator is used in many trading strategies and is popular for stock market speculation or as part of trading robots. It’s a favorite among traders, and you will love it too once we’ll show you what it can do!
How to Read the MACD indicator
The MACD indicator consists of three main components:
- MACD (main) line
This is the difference between the fast (short-term) exponential moving average (EMA) and the slow (long-term) EMA. Typically, it uses a 12-day EMA and a 26-day EMA. - Signal Line
A 9-day EMA of the MACD line, which acts as a trigger for potential trade signals. - Histogram
This visualizes the difference between the MACD line and the signal line. If the histogram is above zero, the MACD line is above the signal line, indicating upward momentum. Conversely, when it’s below zero, it signals downward momentum.
You can interpret the MACD indicator data like this:
- The MACD line crosses the signal line from below: This is a buy signal, indicating the start of an upward trend.
- The MACD line crosses the signal line from above: This is a sell signal, suggesting a potential trend reversal.
- Histogram bars are too far above the zero line: This indicates an overbought condition.
- Histogram bars are too far below the zero line: This signals an oversold condition.
Overbought means the price of an asset has risen significantly and is seen as overvalued by market participants. No one wants to buy something overpriced, so an overbought market often leads to a price reversal downward.
Oversold is when the price of an asset has dropped sharply and is considered undervalued. In this case, you can often expect a price reversal upward, moving into a bullish trend.
How to Add the MACD indicator in the cTrader Platform
The MACD indicator is available on all trading platforms offered by Fintokei. You can find it in the indicators/oscillators menu. To add it to your chart in cTrader, simply:
- Right-click on the chart
- Select Indicators → Oscillators → MACD Crossover
Set the long-term EMA to 26 days and the short-term EMA to 12 days, just as shown in the example below. Leave all other settings as default (you can, of course, customize the colors to your liking).
Don’t Forget – Even the MACD indicator Isn’t Perfect!
The MACD indicator is just one tool to help you identify favorable market entry conditions. However, it’s not infallible. Always confirm your entry with another indicator, such as a reliable candlestick pattern, to ensure you’re making a well-informed decision.
