HomeEducationForex Technical AnalysisWhat Is MACD?

What Is MACD?

MACD is a technical analysis indicator known as the Moving Average Convergence Divergence indicator. The indicator has been set to function as a result of this calculation. It is calculated by subtracting 2 moving averages which are the 26 day and 12-day exponential moving averages. Once calculated the results gives a signal line which is a 9 day EMA which is plotted on the chart and gives the trader potential buy and sell signals off the market they are trading.

MACD essentially captures trend-based information and shows the trader the strength in which the market in trading. By giving the trader the ability to view past momentum the MACD indicator hopes to enable traders to be able to make guided decisions on where the future moves of the market can be derived from.  

How to set the MACD indicator?

The  MACD is used as a technical indicator that can be found on most trading platforms offered by retail brokers. Platforms like Metatrader are very favourable for traders looking to use this indicator. The indicator once applied come in the form of a histogram. In getting the histogram applied to the chart which is to be traded, first a set of parameters must be set. They appear as shown below.

As the above shows, you have a set of 3 numbers that are already prefilled. These represent the following.

  • 12 – Fast EMA – this shows us the momentum of the last 12 days, depending on the time frame and period which is selected.
  • 26- Slow EMA – this shows us the momentum of the last 26 days, depending on the time frame and period which is selected.
  • 9 – MACD SMA – this is a subtraction of the above 2 periods. Once calculated it gives us the average movement of both slow and fast EMA’s

What is the MACD Histogram Indicator?

Once the settings of the various periods have been placed and inputted to the respective trading platform. The next step is to bring this up in the form of the actual histogram itself, which as alluded to above. 

Once set you can see the dotted red line which is tracking the momentum/histogram bars. The red line is the 9-day MACD SMA average line. The x-axis shows the date/time stamps, and the y-axis shows the average movement in price within that period.

This example shows is used with a 1-day time frame. Depending on the time frame which is selected the results of the MACD histogram will change.

How can you use MACD to buy/sell?

The MACD indicator is often used as a strategy for traders looking to buy or sell. Like many momentum indicators, its core function is to track past movements and plot where a shift in direction could take place. Depending on the positioning of the MACD line within the histogram will show traders a potential opportunity to enter on a long or short.

As you can see from the above. When the MACD line is towards the bottom of the histogram we traditionally see the markets in a bear streak. These are where buyers may start to hover as they believe there could be a change in the momentum. 

On the other side when the MACD line is near the top of the histogram, we see the seller’s flock and anticipate a potential drop.

Guide how to trade using MACD

Looking for long or trading opportunities in 2020 using the MACD? There are many online brokers like eToro which provide interested investors with the opportunity to trade volatile markets using this indicator and are perfect for long or short traders. If you are interested in getting involved in this rapidly moving market by using the MACD indicator, below is the easy process to follow to get started.

Step 1: open a broker account

Step 2: decide your investment level

Step 3: deposit and start trading with MACD

Best Brokers for MACD analysis

The best brokers for MACD  are usually those who allow the use of this Oscillator, have a range of liquidity providers and markets, good execution speeds and generally reliable. Trading volatile markets can be risky and expensive, so brokers would need to offer the above and more, to help ease your mind when trading with them at the best cost.

Here is our list of the best brokers for MACD trading:

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Coinbase is one of the first places that made it easy to buy bitcoin and has since become a widely trusted exchange in the market.
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