MACD trading is a strategy using the Moving Average Convergence Divergence. The MACD is one of the most popular technical indicators used in trading.
It’s simple and flexible; finding the momentum or confirming a trend. The MACD trading strategy can be used to find entries and exits.
The stock market is a battle of the bulls and the bears. Each trader is trying to get a piece of the win. In order to do that, traders look for tools to give them the advantage over others.
The MACD calculates the difference of two exponential moving averages; the 12 and 26 EMAs. The 12 EMA is faster than the 26 EMA.
You add the closing prices of the time periods being measured between the 2 EMAs. You can add in the 9 EMA to track buy and sell signals.
Hence it’s known as the signal line. However, remember that the MACD is a lagging indicator. MACD trading should be used in conjunction with candlesticks and patterns.
MACD trading has different strategies you can use. These strategies can be quite helpful to use for trading the stock market.
MACD TRADING – CROSSOVERS
MACD trading crossovers are one of the most popular MACD trading strategies. The MACD cross can be either bullish or bearish in nature.
When the moving average lines of the MACD cross, this can be used to get in or out of a stock. It has the red and green bars that confirm bearish and bullish moves.
As a result, the MACD crossover can and is used as confirmation of a trend or momentum change. Traders use it to avoid getting faked out on a move.
For example, when the MACD falls below the signal line, things are bearish. The opposite is also true. When MACD raises above the signal line, the bulls are in control.
However, remember to use other forms of technical analysis to confirm moves.
MACD TRADING – THE DIVERGENCE
The divergence is one of the most popular strategies of MACD trading. However, it’s also the least successful; especially when done without the help of other technical indicators.
MACD divergence is when the price of a stock moves away from the MACD. It signals the end of a price movement or trend.
For example, price can be moving up or down opposite of the MACD direction. For instance, if price is moving up while the MACD is falling, traders may see it as a rally about to end.
Consequently, if price is moving down while the MACD is moving up, then that can be seen as a bullish reversal getting ready. However, this strategy isn’t an accurate one.
Prices can have a few bursts that can trigger stops as well as forcing traders to exit a trade before it’s made them money.
The MACD can look to be crossing over. As a trader, you’ll always want to get the best entry. Who wouldn’t want to enter a trade as the MACD was moving into new territory?
However, that kind of thinking has frustrated many traders over the years trying to trade the MACD divergence.
MACD TRADING – THE DRAMATIC RISE STRATEGY
MACD trading strategies also include the dramatic rise. This occurs when the MACD rises dramatically. Seems obvious right? Hence how it got its name.
The shorter moving average pulls away from the the longer moving average. This actually signals that a stock is overbought or oversold depending which direction it’s crossed.
Many traders confirm this move with the RSI. The relative strength index is used as a tool to see when a stock is overextended in either direction.
This signals a pullback is coming. It also confirms the strength of a trend. The RSI can stay in oversold or overbought territory for a few weeks. Hence confirmation of a strong trend in place.
MACD TRADING – USING OTHER INDICATORS
MACD trading requires the use of other technical analysis. Fake outs are one of the great tools of taking a traders money. Many times bulls and bears get trapped after being tricked into a trade.
MACD trading by itself wouldn’t stop that from happening. However, when you add in other forms of technical analysis, you get confirmation of moves.
When you’re trading, you’re required to make split second decisions; especially when trading low float stocks. If you have a large position in a stock and it was place on a fake out, you could be hurting.
As a result, using other indicators can confirm moves. Support and resistance might be the most important trading strategy to know. First you should know how to map those levels out.
Then you can add in other indicators. MACD trading is best used in conjunction with other forms of technical analysis.
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