Discovery Trading - MACD indicator

What is the MACD?

The MACD is a momentum indicator that shows the relationship between two exponential moving averages (EMAs) of an asset's price. It has three main components:

• MACD line: The difference between the 12-period EMA and the 26-period EMA.
• Signal line: An EMA of the MACD line over 9 periods.
• MACD histogram: The difference between the MACD line and the signal line.

How is the MACD calculated?

1. MACD line :

   • MACD line = EMA(12) - EMA(26)

2. Signal line :

   • Signal line = EMA(9) of MACD line

3. MACD histogram :

   • MACD histogram = MACD line - Signal line

MACD interpretation

The MACD can be interpreted in several ways to identify trends and trading signals.

1. MACD and Signal Line crossings :

   • Bullish cross : When the MACD line crosses above the signal line, it's a buy signal, indicating a possible uptrend.
   • Baissier crossing : When the MACD line crosses below the signal line, this is a sell signal, indicating a possible downtrend.

2. Position of the MACD line in relation to the zero line :

   • Above the Zero Line: When the MACD line is above the zero line, this indicates an upward trend.
   • Below the Zero Line : When the MACD line is below the zero line, this indicates a downward trend.

3. MACD divergences :

   • Bullish Divergence : Occurs when the price forms lower lows while the MACD forms higher highs. This may indicate a possible reversal of the upward trend.
   • Divergence Baissière : Occurs when the price forms higher highs while the MACD forms lower lows. This may indicate a possible reversal of the downtrend.

Practical example

Suppose you analyze the EUR/USD chart with the MACD. Here's how you might interpret the signals:

1. Bullish cross :

   • The MACD line crosses above the signal line at 1.1800, signalling potential buying. You enter a long (buy) position at this level.

2. MACD Line position :

   • The MACD line is above the zero line, confirming an upward trend.

3. Bullish Divergence :

   • The price is forming lower lows at 1.1750, but the MACD is forming higher lows, signalling a possible reversal of the uptrend. You maintain your long position.

Using the MACD in Trading

The MACD is a versatile indicator that can be used in a variety of ways to enhance your trading:

1. Trend confirmation :

   • Use the MACD to confirm trends identified with other indicators or analyses.

2. Timing of inputs and outputs :

   • Use MACD crossovers to identify entry and exit points.

3. Identifying Discrepancies :

   • Watch for divergences to anticipate trend reversals.

Conclusion

The MACD is a powerful tool for traders seeking to identify trading trends and opportunities. By understanding how to calculate and interpret the MACD, you can make more informed trading decisions and improve your results.

We hope this article has helped you better understand the MACD indicator. If you have any questions or would like to share your experiences, don't hesitate to join us on social networks with the hashtag #xenesy and identifying @xenesy_project. Happy trading!