MACD is assistant that shows the interplay of moving averages (MA): connection and disconnection of exponential curves. This is common oscillator for traders, as it gives large amount of useful data for the forecast. In 1979, trader Gerald Appel was formulated this financial assistant for effective trading in stock markets. Today MACD is used on various trading platforms and is offered by all brokers in standard instrument bars.
What elements does the MACD consist of?
Indicator, like all traditional oscillators, is situated in the lower part of the work area of trade display. It includes two visible curves (MACD, signal line) with different periods, and the third, invisible (baseline). Moreover, oscillator has a histogram that visually shows degree of connection or disconnection of curves.
MACD Configurations
Standard parameters: 12; 26; 9. Developer G. Appel used these optimal settings for the instrument. With these settings, you can experiment and choose different options depending on the accepted strategy in trade. But if the trader has little experience, it’s better not to change these settings.
- MACD curve with a short period (fast) – 12.
- Signal line with a long period (slow) – 26.
- Baseline with signal period – 9.
Settings for visual display of the indicator include the thickness and colour of the lines. You can configure these configurations at your own discretion or leave by default.
How does the oscillator work?
This indicator effectively operates under “bearish” and “bullish” trends, because it is indicator of the trend. Mechanism of action of this instrument is the interplay of two sliding lines. A fast curve shows short-term price changes, and a slow one shows long-term trends. Histogram is visualizing difference between these curves. At first glance, MACD is a complex instrument, but if you will analyse its work with different time frames, you can understand the principle of this indicator and will allow you to learn how to extract useful information.
- Definition of the general trend. MA move down, the slow signal line below the fast one and the degree of disconnection between them goes to increase is a stable “bearish” trend. When the moving averages are directed upwards, the distance between them increases and the slow line is higher than fast one, this means a strong “bullish” trend.
Oscillator MACD and downtrend
Oscillator MACD and an upward trend
Connection of the signal line average with the MACD curve indicates a decrease in trend strength. Intersection of sliding lines indicates a change in trend. This is a good signal for the transaction.
- Determination of short-term price fluctuations with the help of a histogram. The green bands of this graphic element indicate the strengthening of the uptrend, while the red bands show a downward trend.
Histogram signals for deals are its highs/lows. Identify them is not difficult. If last band of growing chart is less than previous one, then this is the maximum. When last band of falling graph is higher than previous one, this is the minimum. These signals are most effective on a minute time frame.
Summary
Financial instrument MACD for 40 years worthily serves traders and helps them to conclude profitable transactions on different market platforms. Its effectiveness is proved by time. Main advantage of indicator is presence of impulse and trend elements: exponential curves and histogram.
However, this characteristic is not always positive. As all moving averages signal changes in trend with a delay. It means that MACD doesn’t for scalping. Instrument inaccurately reveals overbought/oversold of market, as it doesn’t have a strictly limited scale. The ability to use this assistant is another useful skill in trade.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future
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