Trader’s Hack: Moving Average Convergence/Divergence (MACD)

Hello, let’s talk about how to find the strength of the trend.

Did you hear: “Trend is your friend” ? And it’s absolutely true for a trader. Even if there is a light sideways movement in a narrow range, it is still a trend but sideways. So, the question is: “How to identify strong directions of price movements”? That’s why we are going to talk about MACD (which is Moving Average Convergence/Divergence).

How it works

The strongest indicator of price direction movements is the Moving Average (MA) indicator. The rule is that a lower period MA catches fast trends and is very sensitive to price changes while the opposite is true for a higher period MA. If you want to understand when the fast trend becomes longer (in time) you should follow the difference between lower and higher MA periods. This is actually the purpose of MACD.

MACD

Its plot fluctuates from negative to positive around the central line (a zero line) and shows when a lower period MA crosses a higher period MA (a histogram of the indicator).

How to use

First, open “Settings” (click on the wheel icon close to an asset name) and go to the “Indicators” tab. Secondly, click on “MACD” and configure settings or just click “Apply” to use the default settings.

Signals

There are three types of MACD signals:

1. Signal line cross

a) Buy when a MACD histogram above the signal line. It means that a lower period MA is going to cross or has already crossed a higher period MA from down to up and that movement is stronger than the previous movement periods.

b) Sell when a MACD histogram below the signal line. It means that a lower period MA is going to cross or has already crossed a higher period MA from up to down and that movement is weaker than the previous movement periods.

a) Buy when a MACD histogram above zero line. It means that a lower period MA crossed a higher period MA from down to up, and the trend goes up.

b) Sell when a MACD histogram below zero line. It means that a lower period MA crossed a higher period MA from up to down, and the trend goes down.

Divergence trading

a) Buy when you find a positive divergence.

b) Sell when you find a negative divergence.

A “divergence” means a situation when an asset price and the indicator’s line move to the opposite directions.

For advanced strategies you can use MACD along with the following indicators:

1. Parabolic SAR

2. Bollinger Lines

3. Stochastic