How To Use MACD Indicator To Make Better Trades

MACD is probably one of the few indicators that everybody has heard about.  As a matter of fact, MACD is one of the most popular and broadly used indicators for trading. This article is intended to give an overview of MACD indicator and how to use it for effective trading. Let’s get started!

What is an M.A.C.D indicator?

M.A.C.D. stands for Moving Average Convergence Divergence. The MACD indicator is a momentum indicator that is formed using two EMAs (Exponential Moving Averages). MACD consists of three parts: MACD line; Signal Line; and MACD Histogram. The line at the center is called as the zero line.

#1 MACD Line: MACD Line is formed when the 12 day EMA of the closing price of the stock is subtracted from 26 day EMA of the closing price of the stock.

i.e, MACD Line = (26 day EMA – 12 day EMA) of stock’s closing price.

#2 Signal Line: Signal Line is the 9 day EMA of MACD Line.

i.e., Signal Line = 9 day EMA of MACD Line.

#3 MACD Histogram:  It is formed by subtracting the Signal Line from MACD Line.

i.e., MACD Histogram = MACD Signal Line – MACD Line

Whenever MACD Line crosses above the Signal Line, the MACD Histogram is positive. Conversely, Whenever MACD Line crosses below the Signal Line, the MACD Histogram is negative.

MACD and Momentum

  • Whenever the value of MACD is positive, it implies that there is an increase in the upside momentum. This is because the 12 day EMA is above the 26 day EMA.
  • Whenever the value of MACD is negative, it implies that there is an increase in the downside momentum. This is because the 12 day EMA is below the 26 day EMA.

MACD for Identifying Trend

MACD can be used for identifying both bullish and bearish trends.

Bullish Trend

The trend is said to be bullish

  1. When MACD line crosses above the signal line.
  2. When MACD line crosses the zero line and moves above the zero line. This is called as Bullish Zero Line Crossover.
  3. Whenever the MACD line rises faster than the signal line.

The figure below shows how MACD can be used for identifying bullishness.

Bearish Trend

The trend is said to be bearish

  1. When MACD line crosses below the signal line.
  2. When MACD line crosses the zero line and moves below the zero line. This is called as Bearish Zero Line Crossover.
  3. Whenever the MACD line falls faster than the signal line

The figure below shows how MACD can be used for identifying bearishness.

How to Use MACD for Trading

Buy signals are generated for a stock whenever

  • MACD line crosses above Signal Line
  • MACD line crosses above zero line and starts moving up

Sell signals are generated for a stock whenever

  • MACD line crosses below Signal Line
  • MACD line crosses below zero line and starts moving down

The figure below shows buy and sell signals for a stock using MACD indicator.

Happy Trading!

Tara