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Ultimate MACD Trading Guide For Beginners (Forex, Crypto & Stock MACD Strategies) - YouTube
Channel: The Secret Mindset
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The MACD is one of the most popular and broadly
used indicators for forex and stock trading.
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MACD stands for moving average convergence
divergence because it requires moving averages
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as its input.
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The MACD is one of the simplest and most effective
momentum indicators available.
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The MACD turns two trend-following indicators,
moving averages, into a momentum oscillator
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by subtracting the longer moving average from
the shorter one.
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The moving average convergence divergence
is a relatively easy-to-use tool, but it is
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crucial to understand it fully before attempting
to trade using its signals.
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Let’s take a close look at the structure
of the MACD indicator and its default settings.
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The MACD indicator consists of three components,
namely two lines and a histogram.
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• The MACD line is the faster line on the
indicator.
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This line reacts faster to price changes and
is more sensitive, moving above and below
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the second line of the indicator.
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• The second line of the indicator is the
MACD signal line.
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This line is slower and it gets frequently
breached by the faster MACD line.
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• We also have the MACD histogram – the
MACD histogram simply represents the difference
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between the MACD line and the signal line.
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The bigger the gap between the lines, the
higher the bars that the MACD histogram will
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display.
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If the two moving averages come together,
they are said to be ‘converging’ and if
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they move away from each other they are ‘diverging’.
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So the MACD is a trend-following momentum
indicator that shows the relationship between
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two moving averages of price.
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The MACD line is calculated by taking the
difference between a longer-period and shorter-period
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exponential moving average.
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Exponential averages are used because they
respond more quickly to changes in price,
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since more weight is placed on the most recent
price compared to the earlier prices.
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You can use any length of period you wish
when calculating the various exponential moving
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averages, although the 12-, 26-, and nine
period averages are most frequently used.
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To understand how the MACD can be used in
trading, you first need to know how it works.
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This chart shows the relationship between
the two moving average lines and the MACD
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for EUR/JPY.
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The top part of the chart contains the daily
prices for the currency pair, as well as a
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12- and 26 exponential moving average.
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The bottom part contains the MACD line, the
signal line, the histogram and the zero level.
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3 things stand out from this chart.
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First, you can see that as the two moving
averages move away from each other, the MACD
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line rises or falls.
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Second, you can see that when the two moving
averages cross, there is a corresponding crossing
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of the zero level by the MACD line.
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Third, when the signal line and MACD line
averages cross, there is a corresponding crossing
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of the zero level by the MACD histogram
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So, when the indicator is plotted on a chart,
the most important aspect is the interaction
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between the two lines, as well as their positions
relative to the zero line.
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• When the MACD line is above the zero line,
it indicates that the shorter-period moving
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average is above the longer period moving
average, which in turn indicates that the
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market is bullish
• When the MACD line falls below the zero
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line, the shorter period moving average is
less than the longer-period moving average,
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indicating that demand is more bearish than
it was in the past
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• If the fast line is above the slow line,
MACD-histogram is positive and plotted above
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the zero line, suggesting a bullish bias
• On the other hand, if the fast line is
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below the slow line, MACD-histogram is negative
and plotted below the zero line, indicating
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a bearish momentum.
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In general, MACD indicators are used in one
of three ways—crossovers, overbought/oversold
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conditions, or divergences.
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Crossovers are probably the most popular use
of MACDs: a sell signal is generated when
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the MACD crosses below the signal line, and
a buy signal is generated when the MACD crosses
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above the signal line.
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In addition, the locations of these crossovers
in relation to the zero line are helpful in
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determining buy and sell points.
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Bullish signals are more significant when
the crossing of the MACD line over the signal
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line takes place below the zero line.
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Confirmation takes place when both lines cross
above the zero line.
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Here are some examples of MACD crossovers.
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Using the MACD in this way makes it a lagging
indicator.
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Just like moving averages—which are also
lagging indicators—the MACD works best in
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strong trending markets.
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Both the MACD and moving averages are intended
to keep you on the “right” side of the
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market (on the long side during uptrends and
on the short side or out of the market altogether
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during downtrends), meaning you buy and sell
late.
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While you may enter a trade after the beginning
of a trend and exit before the trend comes
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to an end, I would use this indicator as a
buffer to reduce risk, not as the main signal.
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Another use for the MACD is to determine when
a given security or index is either overbought
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or oversold.
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An overbought condition may exist when the
price has experienced a significant upward
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move.
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At some point you expect that the price might
fall and return to some more “normal”
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level.
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Likewise, when the price has seen an extended
downward movement, an oversold condition may
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exist.
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At some point the price may be expected to
rise to some normal level.
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A security or index may be overbought when
you see the MACD rise significantly.
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During this period, the shorter moving average
used in the MACD calculation is rising faster
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than the longer moving average.
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This is an indication that the price is overextending
itself and, at some point, may reverse its
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course.
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When using the MACD to identify periods when
a security or index is overbought or oversold,
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the best buy signals come when the MACD line
and the signal line are below the zero line—as
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the security or index may be oversold.
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Sell signals are generated when the lines
are above the zero, where they may indicate
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an overbought condition.
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Unlike other oscillating indicators such as
the rsi (relative strength index), there is
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no pre-determined overbought or oversold condition.
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High and low MACD levels are relative, depending
on the security or index you are examining.
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You may need to study the behavior of the
MACD over time before you can determine when
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the price is overbought or oversold.
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Looking at the MACD behavior over an extended
period of time, you may be able to discern
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patterns where the MACD may rise or fall to
relatively similar levels, at which point
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the price will fall or rise, respectively—
and with it the MACD lines.
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The third popular use of the MACD is to identify
those times when it diverges from the price.
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A divergence occurs when the trend of the
price does not agree with that of the indicator.
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In other words, an indicator trends in one
direction while the price goes another, or
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does not go in the same direction.
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MACD divergences tend to preface a reversal
in the current price trend.
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A bullish divergence forms when a price records
a lower low and the MACD forms a higher low.
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The lower low in the price affirms the current
downtrend, but the higher low in the MACD
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shows less downside momentum.
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A bullish divergence takes place when the
MACD is making new highs even though prices
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fail to reach new highs.
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Greater importance should be placed if the
price makes a new relative low while this
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pattern develops.
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Furthermore, both signals carry greater significance
if they occur at relative overbought or oversold
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levels.
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You can use the MACD histogram to search for
divergences, but also the MACD line and the
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signal line.
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The strongest signals appear when there is
a double divergence, on both the histogram
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and on the signal and MACD line.
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Here are some examples of double divergence.
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This is my favorite way to use the MACD, and
the most effective way.
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Trading MACD divergence, if done correctly,
can provide you with a real edge in the market.
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It can be a powerful early indicator of trend
reversals when combined with price action
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and support and resistance.
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Now, regarding timeframe.
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There is no such thing as a ‘best’ time
to use the MACD indicator, this will be completely
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down to you, your personal preferences and
trading plan.
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However, daily signals are more significant
than 5 minute signals, just as weekly signals
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carry more weight than 15 minutes signals.
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One common technique is to track the behavior
of the MACD on a daily basis.
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However, instead of entering or exiting a
trade based on a daily signal, you could refer
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to the weekly chart to see where the MACD
is.
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For example, if you receive a buy signal from
the daily MACD and you see that on the weekly
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chart the MACD is in a bullish “condition,”
you may wish to enter a long position.
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However, if the weekly MACD is in an overbought
condition, you will probably want to ignore
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the buy signal from the daily MACD.
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As always, if you learned something new, make
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Until next time.
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