MACD - YouTube

In this video we’re going to look at the moving average convergence divergence indicator,

which is more commonly referred to as the MACD or MAC-D.

A gentleman by the name of Gerald Apple is accredited with introducing the MACD to the

world in the late 1970s.

As the name suggests, MACD is derived from the relationship between moving averages.

Usually a 12 period exponential moving average at a 26 period exponential moving average.

Unlike other indicators the MACD provides both trend following and momentum insights.

With momentum or velocity reflected in the convergence and divergence of the 12 and 26

period exponential moving averages.

A third moving average provides a signal line.

Now, this is usually a 9 period simple moving average of the MACD line which is of course

the 12 period EMA minus 26 period EMA.

Now, the best thing to do is probably to have a look at a few example of this.

On the screen in front of us right now you can see a chart with the MACD indicator down

the bottom and we’ve also put the 12 and 26 period exponential moving averages on here.

Now this is the standard default version of the MACD indicator that comes with MT4.

In a moment we’ll have a look at another version that’s available to you through

IBFX.

First of all, down the bottom here on the indicator the histogram shape that we’re

looking at, this is in fact the MACD.

So this histogram is showing you the difference between the 12 period and the 26 period exponential

moving averages.

The green line that we see moving through the indicator – this is the signal line.

So this is a 9 period simple moving average of the histogram, of the MACD.

So if we have a look you can see at this point here where the MACD is crossing the zero line,

that’s happening at the time when the moving average is crossing over, here we have another

cross over in the moving averages as MACD crosses the zero line, and you can see again

same thing happening over here.

And further over.

Now over the years we have encountered quite a few clients that actually prefer to see

this indicator presented in what we call the traditional style and that’s what we’ve

created with this indicator that we call MACD traditional.

Now to find this version of the indicator you need to come to the navigator window,

look for custom indicators, scroll down until you find the IBFX MACD traditional – there

it is.

And you’ve got a new chart that you want to put it on you can just double click it

or drag it and drop it across.

You can change some of the parameters here as you see fit.

And that puts the indicator on for you.

Now, we go back to the one that we prepared because on this chart we also, again, we’ve

put the 12 period and 26 period exponential moving average on the price chart.

Now this time on the MACD indicator, the MACD traditional indicator it’s actually this

thick red line is the MACD indicator itself.

The green line is again the signal line.

So that’s the 9 period simple moving average of the MACD.

This time the histogram actually represents the difference between the MACD and the signal

line.

Now there are a few signals that we should look out for when using the MACD.

The first of these is when the MACD crosses the signal line as it does here.

When the MACD crosses above the signal line as it did back at this phase, that’s actually

a bullish crossover.

It is a buy signal.

And when the MACD crosses below the signal line as it did here, that’s a bearish crossover

and it is regarded as a sell signal.

Now the histogram can help you to visualize this because, of course, the histogram represents

the difference between the MACD and the signal line.

So when the histogram is narrowing it suggests that a crossover is approaching.

If the histogram is widening that implies an ongoing trend that is potentially getting

stronger.

Something else to look out for is when the MACD line crosses the zero level.

So, this horizontal line running through here is at zero we can see the red line here which

the MACD crosses zero at this point.

Now, this is indicating that the 12 and 26 period exponential moving averages are at

the same level.

So, it’s a turning point, a changing point in the trend.

So, when the MACD moves from above the zero line to below the zero line as it has at this

point that’s regarded as a bearish move.

When the MACD line crosses from below zero to above, that’s regarded as a bullish move.

So, we have here quite a bullish move.

Another thing to look out for with the MACD indicator is divergence.

Well, this can be divergence between the price of the security that you’re looking at and

the actual MACD line.

That’s the red line as you can see through here, prices getting progressively higher.

But at that point in time or through that phase the MACD was not confirming that and

we had bearish divergence.

And not long afterwards, prices fell.

In addition to looking for divergence between price and MACD you can also look for divergence

between price and the histogram that we have down here.

Now, we can see through this phase is a little bit of bullish divergence coming in and prices

are still continuing lower but the histogram here had started to turn higher and we’ve

got a little bit of emerging divergence there.

Of course, these divergence signals are going to be better when the histogram is larger,

further away from the zero line and same thing applies with the MACD line itself.

Well, we hope you’ve found this introduction to the MACD indicator to be useful.

As always, if you have any questions about these or any other indicators please don’t

hesitate to contact our global trade support team.

They are standing by 24 hours a day, whilst ever the market is open, ready to take your

calls and answer your emails and help you out in any way that they can.