How the MACD can fetch you money - Newbies
The MACD indicator is a very popular trend indicator on the mt4 platform. It is the first oscillators a new trader would want to use on his chart. When we trade with the MACD, we try to find how moving averages relate to the price. Many traders use this indicator to find a new trend. An MACD on a chart would show you if the new trend is a downtrend (bearish) or if the trend is an uptrend (bullish). As traders, we know how many pips we gain/loose when we open/close a position rightly when a major trend is just forming.
This write-up will teach you how to get strong signals using the MACD. There are picture illustrations taken from the Profiforex Mt4 platform (very fast in order execution and data display)
On your MT4 charts, the MACD can work well on monthly, weekly, or daily charts. When you add it on a price chart, the MACD will show you when the moving averages are moving apart and when they are coming together. This is called divergence and convergence respectively. Most times, when you trade MACD on your MT4, the standard setting of the MACD is "12, 26, and 9". What does this mean to our trade?
The MACD helps us to see the relationship between two moving averages and the price. When trading with the MACD, make sure to use exponential moving averages and not the simple moving averages. This would clear some lags. The standard setting or input parameters for the MACD on your MT4 platform are an EMA 12, another with a period of 26 and then there is the signal line with the period of 9. Also important in trading the MACD is the MACD line. This MACD line is the difference between the 26 and the 12-period EMA.
Now let us go to trading with the MACD proper. When we have a downtrend in the market, the fast moving average (moving average with the smaller period) will move down at greater speed than the slow moving average (the moving average with bigger period). The fast moving average would now cross the slow moving average down. In an uptrend market, the fast moving average would cross the slow moving average up. The MACD line will show the relationships too.
From the image below, you can see the relationship between the 12 and 26 period EMAs as both of them were applied on the chart along with MACD with a chosen period of 12 (for the faster EMA), and 26 period (for the slower EMA. Please note that the signal line is not present here)
Notice that MACD helped traders notice the trend change from a very early stage, as the blue boxes above began before the downtrend was completely finished.
You can see that the MACD greatly helps traders in noticing the change in a trend when it is early and just forming as we saw from our image above that the blue boxes began before the downtrend was totally finished. This is how traders use the MACD to trade. But to understand this very well, from the image above, you will see a "0" line drawn on the MACD indicator. This is a very vital aspect of the indicator as with the help of the "0" line, the trader will be able to tell when there is no difference between the two EMA. This happens when they intersect (crossovers).
So the MACD line will cross the "0" line either up or down depending on whether the fast moving average crosses the slow one up or down too. Before we explain this further, let us talk about another vital part of the MACD we need for our trade; the signal line.
As we saw above, MACD can really play a great role in helping traders notice a potential trend change at a very early stage of a currency pairís move. Trading the "0"line crossover is no more different from opening or closing a trade once the two EMA intersect; this is not the best we can get as these may not always be the best point of entry and exit.
Now this is how the signal line comes in. The signal line is basically a simple moving average gotten from the value of the MACD line. The default for the MT4 setting is usually at a period of 9. For a better means to determine when to open or close a position, we would look at how the MACD crosses the signal line. When the MACD line crossing over the signal line or moving above it, it is a signal to BUY. And when the MACD crosses below the signal line, it is a SELL signal.
(On the image above, the MACD line is the red line while the signal line is blue, watch how they cross each other). What we are saying here is that when the MACD crosses the zero line upward, we see this as a signal to buy. But for us to be surer that it is truly a buy signal, we wait for the MACD not only to cross the "0" line upwards. We wait for it to also cross the "0" line upward and still cross the signal line upwards too. In the other side, to sell, we don't just wait for the MACD to cross the "0" line downward. We now sell when the MACD crosses the "0" line downwards and also crosses the signal line too downwards below the "0" line. This was well shown in the image above.
Finally we will talk about the last component of our basic MACD. This is the MACD histogram. So that we can know better how the Signal line relates with the MACD, a MACD histogram was brought up. This histogram is simply a bar chart which is plotted around the "0" line. It tells you the how the MACD line is moving in relation to the signal line. So this time, when the MACD line crosses the signal line UP, the histogram will cross the "0" line UP too. Equally, when the MACD crosses the "0" line DOWN, the histogram crosses the "0" line DOWN too. This is shown in the image below.
So looking at the chart above, you can clearly see that how the histogram shows us the relationship between the MACD line (red) and the signal line (blue). Also note that the histogram briefly "disappears" at that point where the MACD and signal line momentarily cross. This is because the difference the MACD and the signal line at this point of intersection is 0. And then if a downtrend is forming from there, we see the histogram getting bigger under the "0" line. The bigger the histogram, the stronger the trend. Isn't this wonderful?
Let me put in here that on your MT4, the standard setting for your MACD is "12, 26, 9". The fast EMA is first listed, next is the slower EMA and finally is the signal line input. But you must not always use them, you can vary them based your taste.
Hope this article has been helpful.