Best MACD trading strategies from wisepowder's blog

The moving average convergence divergence (MACD) indicator can identify opportunities across financial markets. Learning how to implement the tool is crucial to a trader‘s success, so we’ve looked at three common MACD strategies.To get more news about WikiFX, you can visit wikifx.com official website.

　　What is MACD？

　　Moving average convergence divergence (MACD) is one of the most commonly used techincal analysis indicators. It is a trend-following momentum indicator, meaning it looks at an assets momentum to ascertain whether the trend is up or down, and as such can be used to provide trading signals and identify trading opportunities.

　　How does MACD work？

　　The MACD indicator works using three components: two moving averages and a histogram.

　　The two lines within the indicator may look like simple moving averages (SMAs), but they are in fact layered exponential moving averages (EMAs). The main, slower line is the MACD line, while the faster line is the signal line.

　　If the two moving averages come together, they are said to be ‘converging’ and if they move away from each other they are ‘diverging’. The difference between the two lines is represented on the histogram. If the MACD were to be trading above the zero line, it would confirm an uptrend, below this and the indicator would be used to confirm a downtrend.

　　If the market price was found to be trending upward – reaching higher highs and higher lows, as well as breaking key levels of resistance – traders might enter long positions. While traders might opt to enter a short position if the asset was in a downtrend, characterised by the lower highs and lower lows, or breaks in support levels.
The MACD line and signal line can be utilised in much the same manner as a stochastic oscillator, with the crossover between the two lines providing buy and sell signals. As with most crossover strategies, a buy signal comes when the shorter-term, more reactive line – in this case the MACD line – crosses above the slower line – the signal line. Conversely, when the MACD line crosses below the signal line it provides a bearish sell signal.

　　As the crossover strategy is lagging by nature, it is based on waiting for a movement to occur before opening a position. The main issue faced by the MACD in weaker market trends, is that by the time a signal is generated, the price may be reaching a reversal point. This would then be considered a ‘false signal’. It is worth noting that strategies which utilise price action for confirmation of a signal are often seen as more reliable.

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