MACD indicator
It can be difficult for many traders to learn to trade the financial markets with short-term momentum indicators.
But trading can be more difficult if the trader is not familiar with these simple technical issues.
This article will be interested in explaining one of the most important indicators Technical Analysis It is widely used by traders, and it is the MACD indicator.MACD).
It is an indicator designed by “Gerald Abel” during the sixties of the last century.
Some may think that it is a complex indicator, but in fact it is very simple in the way it is used and the way it is calculated as well.
Background on the MACD indicator
The MACD is famous for being able to detect areas in the financial markets where it shows strong short-term momentum.
But before we explain the details of the indicator, we must first understand the relationship between the long-term moving average and the short-term moving average.
As it is clear from the following chart, there are many traders who follow the short-term moving average (the blue line), and when it intersects with the long-term moving average (the red line), this may be a buy signal, and then you can enter a buy.
On the other hand, in the event that the short-term moving average intersects with the long-term moving average down, it will be a selling signal, and then it is possible to enter a sale on the stock or currency.
| Figure (1) |
Notice how there were some areas in which the moving averages moved away from each other in Figure (1), which was a sign of high momentum in the movement.
In fact, the MACD indicator was designed in order to take advantage of these signals of the divergence of the two averages from each other, or to analyze the distances between them, to display the strength and weakness of the momentum of the price movement in the financial markets.
More precisely, the calculation of the indicator comes by subtracting the value of the long-term exponential moving average from the value of the short-term exponential moving average in the same period, and then the difference is drawn in the form of a line on the chart.
The default setting of 12 or 26 days is often used to use both short-term and long-term moving averages.
In the event that there is a positive value of the MACD indicator (i.e. the difference between the two averages), this means that the short-term average has crossed the long-term average upwards, which means that the strength of the upward movement has increased.
This signal means that the trader can wait before closing his open buying positions.
In the event that a negative value is recorded on the indicator, this means that momentum is rising in support of the downward trend of the stock or currency in the currency market.
On the other hand, a decline in the negative value of the indicator means a decline in the strength of the downside trend and the possibility of it turning into an upward trend soon, and so on.
Trading signals
The default mode of the MACD indicator is that another moving average of the same indicator is calculated and plotted with it on the chart in order to use it to get some signals.
He calls this new moving average the signal line.
It is calculated by making a moving average of nine time units from the MACD indicator itself, and this appears to be shown in the next figure (2).
The MACD line is the black line and the signal line is the blue dotted line.
Perhaps the positive signal (buy signal) comes from a positive crossover between the MACD line and the signal line up, and the negative signal (sell signal) comes from a negative intersection of the signal line from the MACD line down.
It should be noted that there is a horizontal line around which the cursor rotates, which is the zero line.
In the event that there is a buy signal, but the MACD is still below the zero line, the trader should be careful, because in that case he is trying to get profits by betting on a downward trend change to an upward one. In general, a signal that occurs below the zero line and is a buy signal is often more risky than a signal that may occur above the zero line.
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| Figure (2) |
Another sign that can be noticed on this indicator is when the direction of the indicator is different from the direction of the price movement and this signal is called divergence.
In general, this signal is used by professionals in the financial markets in a large and frequent way.
The middle line of the MACD
As mentioned earlier, the MACD indicator is calculated by calculating the difference between two exponential moving averages (12 and 26 days), so the subtraction value may sometimes equal zero if the two averages are equal.
This is why the midline for that system is zero.
In the following figure No. (3) it is clear how that line rotates around the cursor.
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| Figure (3) |
Trading based on price divergences in the MACD
As mentioned earlier, trading on breakouts is one of the traditional methods used by many participants in trading, whether in the stock market or the currency market, to trade with the MACD indicator, and it is also one of the most important methods that are used in order to get an early signal about the formation of a peak or bottom.
However, the MACD columns indicator does not attempt to obtain this information, but only shows the divergence between the movement of the trading price and the momentum, and perhaps Figure (4) explains that idea.
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| Figure (4): The negative divergence that can be obtained through the MACD columns indicator.
In the previous chart, prices had reached a new peak in the right half of the chart, but at that time the MACD columns indicator could not record a new peak above the previous peak, which was at 0.3307, but only reached the same value as the previous peak, which resulted in It is the formation of a negative breakthrough. In that case, it was an early indication of the possibility of trading price movements forming a new peak at that time, and it was also an early signal for the participants in the currency market to enter into selling deals to take advantage of the expected decline. |
Unfortunately, these breakouts are not always very accurate, as there are plenty of times when the breakouts fail to give a good indication of the current state of trading prices.
Therefore, the trading participants who try to use this method of trading should use stop loss points in order to know the appropriate time to enter the transaction.
Chart (5) shows an example of the breakouts being clear, but the trading price is not significantly affected by them.
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| Figure (5): Although there was a clear strong negative breakthrough in the previous chart, especially at the drawn black vertical line, this did not prevent the trading prices of this pair in the currency market from continuing to rise in the same direction and did not decrease significantly. Therefore, stop points should be used to filter out signals from breakouts that may be false. |
One of the most important reasons why many trading participants lose a lot of money when relying on the signals generated by the MACD indicator is that they often try to anticipate events, knowing that the MACD indicator is essentially an indicator designed to be a follower of the movement of trading prices and the same logic when dealing With the MACD columns indicator, you should not rely on it alone because it only expresses the movement of the trading prices that occurred.
How to use the MACD bars indicator to get buy and sell signals
It is possible to get buy and sell or entry and exit signals by using the MACD bars indicator. In general, when a negative divergence signal is obtained, this means searching for a good point to enter a sale transaction on the security that is being monitored.
In the event of a positive breakthrough, a suitable point is sought to enter into a purchase transaction on the security being monitored.
But in that case, instead of setting stop-loss points based on the recent top or bottom of the trading price as usual, a stop-loss point is set when the MACD crosses the previous top in the case of a negative divergence or breaks the previous bottom in the case of a positive divergence.
In the event that the index maintains that rule, the financial position is kept open as it is until the trading prices reach the required target.
It is possible for participants in trading in the currency market to benefit greatly from this method. This is due to the large leverages used.
In that case, the more correct the decision, the higher the profits the trader will achieve than trading in the stock market, for example.
It is worth noting that this method of trading requires the trader sometimes to enter into making averages in the event that the trading prices go in a direction contrary to what he expected.
Although it is known in technical analysis books that averages may be rejected, especially in the principles of financial management by not making averages for losing positions.
But in the case of using the MACD columns indicator, there is a realistic reason for making these averages.
The reason is that all the trader is trying to do is take advantage of the time lag between the price action and the reading of the MACD bars.
For example, in the case of a negative divergence and a selling position was opened, then trading prices rose slightly, the rise in prices will not affect the reading of the indicator, and therefore the negative divergence will still exist.
But of course, you should be aware that trading prices may continue to rise without stopping, and in that case, stop-loss points must be set to prevent the accumulation of losses in a large way, and Figure No. (6) explains this idea further.
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| Figure (6): The previous chart shows that the trading prices for this pair in the currency market continued to rise even though the MACD columns did not continue to rise either, and at the same time the trading prices continued to decline after that at the time it stopped The indicator is also declining.
Therefore, the trader should make averages as long as the indicator does not change its direction to take advantage of the divergence. |
Advantages and disadvantages of the MACD indicator
In the previous example, we see that the indicator is very easy to interpret and use, and that its signals are highly efficient, and it can also be used in short-term trading, as it is with the long-term trader.
One of the most important defects of this indicator is that it may expose the trader to some false signals, and the trader opens a financial position by buying or selling, and in the end he is forced to close that financial position again because the signal was not confirmed.
In addition, the index is considered one of the lagging indicators in interacting with the price movement in the financial markets, including the currency market, which is characterized by its rapid movement.
This delay in the indicator’s interaction with the price movement is due to its reliance on moving averages in its calculation. Therefore, it is one of the indicators of the trend in many cases.
On the other hand, this indicator should also not be used in times of sideways trends, as there must be a clear trend to rely on the indicator in making buying and selling decisions in the financial markets.
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| Figure (7) |
Therefore, in the case of a sideways trend, the trader should be more careful when dealing with this indicator.
As it will have a lot of conflicting signals, which may lead to the trader making a lot of useless operations, which may cost him many repeated losses in addition to the costs of executing repeated operations.
Another disadvantage of the MACD indicator is its inability to make comparisons between different stocks or different currencies.
In other words, there are many who use technical analysis using percentages in analyzing price movement.
But as for the MACD indicator, it makes signals based on the dollar value, not the percentage.
Conclusion
Trading is like life, nothing is clearly black and white, but there are some rules that can be followed in order to reach the best possible vision in light of that darkness, which can lead to good profits for the trader, whether in the stock market or the currency market.
Therefore, a financial management plan must be made before entering into any buying and selling transactions in the financial markets.
And in the case of relying on the MACD columns indicator to obtain buying and selling signals, then in cooperation with good financial management it is possible to obtain good profits in the stock market or the currency market.
The MACD indicator is one of the most popular technical analysis indicators because it gives the trader a quick and simple view of the short-term strength and weakness of the current trend in the financial markets, including the currency market.
It also gives clear buying and selling signals to the trader, helping him to trade without the influence of emotions on his decisions.
In addition to being an indicator used by many technical analysts financial markets.
Knowing that there are some minor defects in the indicator, but in general it is possible to rely on it with the rest of the technical analysis indicators to reach the best degree of performance in any financial market.
