Becoming a successful trader requires dedication and a commitment to seeking out new knowledge. Some people end up abandoning their trading goals when they realize the sheer amount of information that is available to them. They get overwhelmed when diving deep into the details and end up giving up before they give themselves enough time to gain momentum. Don’t let this happen to you in your trading journey! Starting small and gaining a basic understanding of the tools traders use to their advantage is the right way to begin a trading career.
It’s important to understand the essentials of trading and technical analysis before you advance into more complex concepts. The perfect example of using the basics as building blocks towards the future is the MACD indicator. After you have a thorough understanding of moving averages and how they are used in trading, you can move on to the MACD indicator. Below, we are going to help you learn about what the MACD indicator is and how to use it in your trading.
What is the MACD Indicator?
MACD, or the moving average convergence/divergence indicator, is a momentum oscillator that traders use to learn more about trends. The MACD is an indicator that is calculated by subtracting the long-term exponential moving average (typically 26 periods) from the short term exponential moving average (typically 12 periods). The MACD indicator utilizes EMA because the calculation reacts to recent price changes quicker than simple moving averages.
A lot of traders rely on the MACD indicator because it is considered to be both simple and effective. It was developed by a man named Gerald Appel in the late 1970s and is widely accepted in the trading community as one of the best indicators to use for trend analysis.
How to Use the MACD Indicator in Your Trading
As traders, we are always looking for ways to spot changes in short-term momentum. Momentum can be a very powerful catalyst in the market, so making sure you are on the right side of the trend is essential if you want to achieve sustained trading success. The MACD indicator is perfect for this because it provides us with a visual representation of short term momentum that we can use to confirm the direction of our trades. It’s a fantastic indicator because it allows us to confirm that the short term price momentum of a security is likely going in our favor.
Trend following and momentum are the names of the game when it comes to using the MACD indicator. You can use the MACD indicator for a variety of different things including intraday trading, scalping, trading breakouts, and trading convergence and divergence. Using the MACD to analyze convergence and divergence in the short and long term moving averages can lead to huge rewards.
One straightforward way to use the MACD indicator is to check the MACD value. Usually, when the MACD value is positive it signifies that the upside momentum is gaining strength. The opposite is true for negative MACD values, which typically signify that downside momentum is increasing.
The MACD indicator can also be used in strong trending markets to make better trading decisions. You can use the MACD to help out on multiple timeframes including the daily, weekly, and monthly charts. Most trading platforms allow you to add the MACD indicator to your charts, and you can also display the indicator as a histogram if you are having trouble interpreting its information with the default display setting.
The MACD is one of the most popular indicators used in technical analysis for good reason. It helps us identify short-term trends in a quick and straightforward way. However, you need to keep in mind that you can’t simply rely on the MACD indicator alone to trade with. Like most trading indicators, it works best when you combine it with other tools and concepts like price action. Remember that there is no such thing as the “perfect trading indicator”. Most traders learn that lesson the hard way!
Staying aware of the limitations of this indicator is important since it can provide false signals in range-bound markets. Although, once you understand how the mechanics of the MACD indicator work though, you can absolutely use it to your advantage.