How to Use MACD in Trading
The Moving Average Convergence-Divergence indicator, or "MACD," is a chart tool in the field of technical analysis. It allows traders and investors of nearly any financial product to better gauge the momentum in price action for the purpose of predicting future prices. It applies to stocks, options, futures, currency trading and nearly any product you can chart. While the patterns of the MACD graph are relatively easy to learn, trading them effectively requires much experience and discipline.
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Instructions
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Apply the MACD study to your price chart. Most software programs provide the MACD as a standard indicator that you invoke via a simple menu or button. When added, the MACD appears as a sub-graph below the main price chart.
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Identify the MACD line itself on the sub-graph, and also its "signal line." Two lines fluctuate and intersect frequently on this chart. The signal line is a moving average of the values of the MACD line.
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Buy into the financial product when the MACD crosses up above its signal line. This signals that the momentum is increasing and prices could rise. Similarly, sell if the MACD crosses below its signal line.
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Buy into the financial product when the MACD crosses up above the zero level, as identified by a horizontal center line on the graph. This can also signal increasing momentum. Similarly, sell if the MACD crosses below the center line.
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Compare the recent lows in the MACD with the recent lows in the prices. If prices fall to a new low but the MACD instead makes a higher low, this is called "divergence." It indicates that momentum is not following the price action, and is in fact rising even as prices fall. Many traders take this as a signal to buy with the expectation that prices will soon reverse and head higher.
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Tips & Warnings
Try combining interpretations into a single strategy. For example, limit your buying trades to moments when the MACD crosses its signal line and then crosses the center line. This gives you more than one reason to be confident.
The MACD is by no means a foolproof indicator. While its patterns do often play out as expected, all too often they provide false signals. Traders rarely rely on a single indicator when making decisions. Use the MACD patterns in conjunction with other criteria and strategies to create a more well-rounded approach to the markets.
