Trading using MACD indicator / Moving Average Convergence Divergence Indicator from metatrader4
Basically MACD line formula is: EMA12 – EMA26 in other words MACD line is came from subtraction of EMA12 and EMA26. That because MACD indicator using EMA indicators, the MACD indicator has the same characteristic with EMA Exponential Moving Average indicator. EMA indicator can give signal more early than other moving average indicator.
As its name, the Trigger line is a trigger line which came from EMA9 indicator.
Center line is zero line which separate histogram negative and histogram positive.
The histogram formula is: MACD line – Trigger line
The histogram line is used to identify overbought and oversold in the market.
Can we use another EMA period to calculate MACD line and Trigger line? Yes of course. You can use different period for EMA to calculate MACD line and Trigger line.
Why we are bothering ourselves to use MACD indicator if we can use EMA indicator? With a simple calculation formula like this, MACD can gives not just trend direction of the market, this indicator can gives you more than that.
MACD Indicator Alert can be used to identify the momentum changes in market which considered as strong or even weak momentum.
MACD Indicator Alert to identify trend reversal
This is the special uses of Moving average indicator which used by MACD indicator for MACD and Trigger line. Trend reversal trading rules in MACD indicator are similar with trend reversal trading rules in Moving Average indicator. But in MACD Indicator Alert we use MACD line and Trigger line.
• If MACD line crosses Trigger line from below, we can consider the market will change its trend direction into bullish trend. And if MACD line crosses Trigger line from above, we can say the market price will change its trend direction into bearish trend.
• If MACD line crosses the center line, we can say the trend is going to change.
• If Trigger line crosses the center line, we can say the trend is going to change either.
Overbought and oversold in MACD Indicator Alert
With MACD calculation formula we can determine long term trend and even short term trend. MACD indicator is also used to identify the oversold and overbought condition.
Overbought is the indication that the market already received too many buy positions, and we can say the market is willing to move down. Oversold is the indication that the market already received too many sell positions, and we can say the market is willing to move up.
Just take a look at the image below:
Line below the center line (negative area) is the area which we called oversold area and line above the centerline (positive area) is the area which we called overbought area.
The bearish movement in the example above started when the MACD histogram leaved the positive area.
How to read MACD Indicator? Here are the complete trading rules of MACD Indicator Alert.
- If the MACD line crosses the Trigger line from below, we can assume the market is going to bullish movement.
- If the MACD line crosses the Trigger line from above, we can assume the market is going to bearish movement.
- MACD line and Trigger line are above the center line, it means the market is in bullish trend.
- MACD line and Trigger line are below the center line, it means the market is in bearish trend.
- Positive MACD histogram means overbought
- Negative MACD histogram means oversold
- Positive divergence means the market price will move bullish
- Negative divergence means the market price will move bearish
That all folks, see you on the next article. Read MA and MACD Trading system and Best MACD Indicators