How to read MACD and trade effectively strategies for newbies
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How to read MACD and how to trade effectively is a topic of interest to many traders. The MACD line is a fairly common and easy-to-use indicator. Therefore, if you know how to read and trade properly, you will find buying or selling opportunities more favorable. This article will show you how to read the MACD line and trade with it effectively for beginners.
What is the MACD indicator?
The MACD indicator is a momentum indicator in technical analysis that shows trend strength. The MACD indicator consists of 4 components:
- MACD line: commonly known as the fast line (blue). MACD formula: MACD line = EMA 12 – EMA 26
- Signal line: often called the slow line (orange). Signal formula: Signal line = EMA 9 of MACD
- Histogram: Bar chart (blue when positive, red when negative). Calculation formula: Histogram = MACD Line – Signal Line
- Zero Line: Horizontal axis to refer to signal lines and Histograms
How to enable indicator to read MACD signal on the histogram
To view charts, traders often use Tradingview. Follow the instructions below:
Step 1: Visit Tradingview’s homepage here, then click “Chart” on the homepage
Step 2: Click on the box in the left corner of the screen to find the stock ticker, cryptocurrency, or forex pair you want to see the chart.
Step 3: On the histogram toolbar, click on the Fx symbol, select Built-ins and select MACD.
Thus the default MACD indicator is enabled on the chart you want to see.
Some traders often find more optimal cyclical parameters for the MACD indicator. However, if applied correctly, we think that using the default MACD is also very effective without using other parameters.
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How to read MACD and trade with MACD effectively.
How to read the MACD line crossing the Signal line
How to read MACD is quite simple:
- When the MACD line crosses the signal line from below, it signals an uptrend.
- When the MACD line crosses the signal line from above, it signals the end of the uptrend, possibly turning to a downtrend.
Therefore, the way to trade buy orders is as follows:
- Place a buy order as soon as the MACD line crosses the signal line from below.
- Place stop loss at the nearest bottom.
- Take profit as soon as the MACD line crosses the signal line from above.
In contrast, with a sell order, do the following:
- Place a sell order as soon as the MACD line crosses the signal line from above
- Place stop loss right at the nearest top
- Take profit when the MACD line crosses the signal line from below
Above is the most basic way to read and trade with MACD. However, if trading is as simple as that, 100% of the market participants win. Of course, that doesn’t happen. The market is always volatile, and nothing will be 100% correct in the future. Therefore, many professional traders often combine other trading methods with the MACD indicator.
Use the MACD indicator and combine trading on multiple timeframes
Combining multiple timeframes can help you avoid some false signals when using the normal MACD trading method. Proceed as follows:
Step 1: Identify the trend in a large time frame (e.g., D1).
Step 2: Switch to the small timeframe, based on the MACD crossover, to find an entry point in the same direction as the large timeframe.
How to enter a buy order combining the MACD indicator and 2-time frames, D1 and H1 :
- D1 timeframe is trending up
- Switch to the H1 time frame, enter a buy order at the point where the MACD line crosses the signal line from below.
Similarly, how to enter a sell order combining the MACD indicator and 2-time frames, D1 and H1:
- D1 time frame is in a downtrend.
- Switch to the H1 time frame, enter a sell order at the point where the MACD line crosses the signal line from above.
Use divergence and convergence MACD to trade.
MACD divergence means that the price trend and the trend of the MACD indicator go in opposite directions. It is a signal that the price trend is coming to an end, and the price may move in the direction of the MACD when the MACD line crosses the signal line.
- The price trend is in an uptrend (the latter high is higher than the previous high), but the MACD is a downtrend. The price may be about to turn to a downtrend after the MACD line crosses the bearish signal.
- Or the price trend is in a downtrend (the latter is lower than the previous one), but the MACD is in an uptrend. The price may be about to rise after the MACD line crosses the signal up.
Combine MACD with reversal candlestick pattern to trade
Traders often combine the MACD indicator with reversal candlesticks to improve trading efficiency to confirm signals before entering orders.
- When a bearish is long, if reversal candles appear, MACD forms a bullish divergence. That’s a buy signal.
- If after a long bullish, reversal candles appear. Meanwhile, MACD formed a bearish divergence. That is a signal to enter a sell order.
Combine MACD with other indicators to confirm trading signals
Technical indicators have perfect accuracy, especially when combining both indicators to confirm the same signal. If 2 indicators give the same signal, the trading signal has a very high probability of success.
Above is a guide on how to read macd and trade effectively with MACD from basic to a combination of other technical analysis methods. Trading signals from the MACD indicator are viral, easy to use, and trusted by many traders. However, as with any other trading signal, signals are always probabilistic. Therefore, it is necessary to combine the MACD indicator with other signals to confirm the trade.