Three MACD trading strategies, IG AU

This article provides three methods by which traders can utilise the MACD technical analysis device to find and uitgang trades.

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Market Analyst, London

The moving average convergence divergence (MACD) is one of the most commonly used technical analysis indicators among the trading community. The instrument provides three elements, each of which can be used to provide trading signals.

The two lines within the indicator may look like elementary moving averages (SMAs), but they are ter fact layered exponential moving averages (EMAs). The main, slower line is the MACD, while the swifter line is the signal line. Ultimately, the difference inbetween the two is represented on a histogram.

This article gives you three commonly used methods by which traders can utilise this device to signal buying and selling opportunities.

The MACD line and signal line can be utilised te much the same manner spil a stochastic oscillator, with the crossover inbetween the two lines providing buy and sell signals. Spil with most crossover strategies, a buy signal comes when the shorter-term, more reactive line (signal line) crosses above the slower line (MACD line). Conversely, when the signal line crosses below the MACD line it provides a bearish sell signal. Spil this indicator is lagging by nature, it is worthwhile noting that strategies which utilise price activity for confirmation of a signal would likely be more reliable.

The chart below highlights this standard crossover strategy. Profitable entry points are highlighted by green vertical lines, while false signals are highlights by crimson lines.

EUR/GBP crossover chart

Histogram reversal

The histogram is arguably the most useful part of the MACD, with the caf signifying the difference inbetween the MACD and signal lines. This means that spil the histogram moves further away from the zero line, the two lines are moving further chic. However, once that expansion phase is overheen and you start to see a hump form emerge, it’s a signal that the moving averages are tightening and is therefore an early sign that a cross is forthcoming. This is a leading indicator, rather than the lagging nature of the crossover strategy, mentioned above.

The chart below highlights the potential to utilise the MACD histogram spil a trading device. By awaiting two counter-trend moves te the histogram, it mitigates the chance that such a stir will be a one-off rather than a reversal. By utilising the device ter the direction of the trend, the chart below highlights three profitable trades and one loser. A trader can also use the contraption for exiting the trade, with positions exited once the MACD starts to switch sides into the opposite direction.

Gold MACD histogram chart

Zero cross

This is often seen spil the slowest signal of the three, with a trade taken when the MACD line moves up through or below the zero level. This signal takes longer to form, meaning you will typically see fewer signals, but also fewer false reversals.

That being said, this method should be used cautiously, spil the delayed nature means that brief, choppy markets would often see the signals issued too late. However, spil a implement for providing reversal signals of long sweeping moves, this can be very useful.

The chart below highlights the past three signals on AUD/USD, with the indicator about to punt a fourth. Each of thesis would have proved profitable, with a number of false signals averted by not following the MACD cross method. It is crucial to understand where to get out, and this market provides a number of trendline violates, which would have signaled a good time to uitgang the trade. Alternatively, use the pauze below the previous sway low (uptrend) or above the prior sway high (downtrend) to uitgang the trade.

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