You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money. The chart below highlights the potential to utilise https://www.bigshotrading.info/blog/how-to-use-the-macd-indicator/ the MACD histogram as a trading tool. By waiting for two counter-trend moves in the histogram, it mitigates the chance that such a move will be a one-off rather than a reversal.

For example, a bullish divergence happens when the MACD forms two rising lows that align with two falling lows on the asset’s price. Conversely, a bearish divergence occurs when the MACD forms two falling highs that line up with two rising highs in the price. So, while the signal crossovers can be helpful, they are not always reliable. Therefore, it is also worth considering where they occur in the chart to minimize the risks.

MACD Crypto trading strategies for Bitcoin and Ethereum

MACD can be used as a filter (additional confirmation) for other indicators. You can also filter signals by analyzing the chart on different timeframes. For example, if you choose a daily chart in which the MACD histogram grows in the positive zone, then on smaller timeframes, you should only open long positions. This approach will help reduce the percentage of positive false signals. While the MACD shows the difference between the moving averages, the RSI works in a slightly different way. It shows the flattened difference between past and current price fluctuations, or simply overbought and oversold levels.

While they represent a similar approach to evaluating forex trades, the functions of both MACD and RSI are distinct, which makes them useful indicators to combine in trade evaluation. Here’s a look at how to use MACD and RSI as part of your trade analysis. If you open MetaTrader, you’ll see that both indicators are in the Oscillators tab. On the contrary, the RSI indicator is calculated by measuring the speed and average price gains/losses. A combination of 3, 10 and 16 can be used for intraday trading. 5, 35 and 5 can be applied to smaller timeframes as they are more sensitive.

Signal-line crossover

You have the ability to change the three numbers depending on your trading strategy. Divergence takes place when the moving averages move away from each other. The MACD histogram is above 0 when the 12-period MA is above the 26-period MA and below 0 when the shorter MA is below the longer MA. As a result, positive values of the histogram point at a bullish trend, while negative values mean a downtrend. The MACD is calculated by subtracting the value of a long-period exponential moving average (EMA) from a short-period EMA. Both moving averages use closing prices of the period that is measured.

The higher high in the security is normal for an uptrend, but the lower high in the MACD shows less upside momentum. Even though upside momentum may be less, upside momentum is still outpacing downside momentum as long as the MACD is positive. Waning upward momentum can sometimes foreshadow a trend reversal or sizable decline. Below is a chart of Cummins Inc (CMI) with seven centerline crossovers in five months. In contrast to Pulte Homes, these signals would have resulted in numerous whipsaws because strong trends did not materialize after the crossovers.

Ways To Interpret The MACD Index

In EUR/USD’s 1-hour chart above, the fast line crossed above the slow line while the histogram disappeared. This suggested that the brief downtrend could potentially reverse. If you look at our original chart, you can see that, as the two moving averages (MACD Line and Signal Line) separate, the histogram gets bigger.

Next, we closely monitor the behavior of the MACD histogram, which, amid a fall in price, goes into a negative value zone and forms a new bottom (red circle). We exit from the market after the formation of the lower red bar (green line). When the chart enters the negative zone, open an order (blue horizontal line). Exit from the market a little later, when the next red bar of the chart is formed slightly below the previous one (green line). Alternatively, you can let the trade close by take profit, which, depending on the risk management, can be equal to one or two distances from the position opening level to the stop loss. As long as the MACD histogram is growing, we can be sure of the strength of the bullish trend.

Using MACD indicators in Real Trading: Examples

Notice that this kind of signals requires confirmation from price action or other technical indicators. A bullish crossover happens when the MACD line crosses above the signal line signifying an entry point for traders (buy opportunity). Conversely, a bearish crossover occurs when the MACD line crosses below the signal line https://www.bigshotrading.info/ presenting as an exit point (sell opportunity). Crossovers can last a few days or weeks, depending on the movement’s strength. Moving average convergence/divergence (MACD, or MAC-D) is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs) of a security’s price.

• This scan reveals stocks that are trading below their 200-day moving average and have a bearish signal line crossover in MACD.
• This will depend on what market someone is trading in, as well as their goals and risk tolerance.
• The histogram is made of a bar graph, making it visually easier to read and interpret.
• As we said above, MACD is the 12-period EMA minus the 26-period EMA.
• Next, we will zoom into the correction labelled A and show another technique commonly used to determine levels where a correction might end.