MACD is the short form of “Moving Average Convergence Divergence”. MACD was developed by Gerald Appel.
MACD is pronounced as either “MAC-DEE” or “M-A-C-D”.
MACD is nothing but the combination of Moving Averages. MACD is the difference between 12(Fast) and 26(Slow) Exponential Moving Averages(EMA).
Generally, in Technical Analysis, MACD is considered as Lagging Indicator, but it acts as Leading Indicator also. MACD Line, Signal Line and Histograms move below and above zero line and acts as centered Oscillators. But MACD Line(In Meta Trader, default MACD doesn’t have Main Line but we can treat Histogram edges for this), Signal Line combination and MACD Line, Histogram combination shows trend of the market. So it is considered as Lagging Indicator.
By default, MACD contains:
12 Days(Period) EMA,
26 Days(Period) EMA and
9 Days(Period) EMA of the MACD.
MACD Line: 12 Period EMA – 26 Period EMA
Signal Line: 9 Period EMA of MACD
MACD Histogram: MACD Line – Signal Line
How to use MACD:
In MACD Indicator window, above “0” line area is called “Positive Zone” and below “0” line area is called “Negative Zone”.
When 12(Fast) EMA crosses 26(Slow)EMA from top, the Histogram and MACD Line cross”0″ line from top to negative zone. This is a Sell Signal.
When 12(Fast) EMA crosses 26(Slow)EMA from below, the Histogram and MACD Line cross”0″ line from bottom to positive zone. This is a Buy Signal.
When MACD Line cross Signal(9EMA) Line from top or Histograms close under Signal Line, this is a Sell Signal.
When MACD Line cross Signal(9EMA) Line from bottom or Histograms close above Signal Line, this is a Buy Signal.
Here we get early Signals to catch the move at the beginning, but we may get too many Fake Signals. Beware of that.
Trading Divergence: Trading MACD Divergence is the most famous and strongest strategy.
Bearish Divergence: When the Price is going up making Higher Highs but MACD Histogram Bars are making Higher Lows, then MACD is diverging. Price is moving up but momentum is decreasing and at any time price may move to the South(Down).
Bullish Divergence: When the Price is going down making Lower Lows but MACD Histogram Bars are making Lower Highs, then MACD is diverging. Price is moving down but momentum is decreasing and at any time price may move to the North(Up).
MACD Divergence Filters:
When you find MACD Divergence, see that Histogram Bar is closed inside the Signal Line. After that only enter into the trade.
Look for any support, Resistance Areas or any Candlestick Patterns. They give you more confirmation.