ULTIMATE MACD GUIDE - ENTRY'S AND EXITS 📚
The Moving Average Convergence Divergence Oscillator, otherwise known as MACD, is one of the most powerful and dynamic indicators, if you can learn to use it properly.
It is easily one of my personal favorite indicators, and one that I currently use when scalping and day trading.
Now before we get into how the MACD works on a technical level, let’s first go over how the MACD helps us fundamentally.
We can break it’s benefits down into 4 categories - in which it allows us to measure and predict the following:
The strength of a pattern
The momentum of a movement
The direction of a movement
The duration of a movement
Let’s breakdown each of those
-The Strength Of A Pattern-
Have you ever seen price approach the outer limits of a wedge, channel, or support / resistance and wondered, cluelessly whether or not it would actually break through or end up rejecting?
The MACD allows us to predict the pressure behind a certain sentiment, and therefore predict the odds of that pattern completing successfully. (possible example)
-The Momentum Of A Movement-
When trading, especially day trading, it is important to have almost impeccable timing for entries and exits. The MACD allows us to see and predict current and future momentum. This is powerful, as it allows us to enter a long before the rest of the market has gone long (essentially entering a long before the market pumps.)
This increases our profit/loss ratio - therefore decreasing risk and allowing for more sturdy stop losses.
-The Direction Of A Movement-
This one is quite obvious when looking at the MACD, but without the indicator, it can sometimes be quite difficult to even see which way the market is trending (periods of high consolidation for instance)
By utilizing the MACD on multiple time frames, we can have a glimpse of where the market is headed, even if it is unknown on the smaller time frames. (the opposite is also true, when the higher time frames are in periods of high consolidation, we can take a look at the lower time frames to get an idea of where it is heading)
-The Duration Of A Movement-
As mentioned previously, it is extremely important as a day trader to have very accurate entries and exits. Ironically, one of the most difficult things for a novice trader to predict is an accurate exit.
if you exit too early, you miss out on valuable profits and further decrease your profit to loss ratio. Yet, if you exit too late, you also lose valuable profits and decrease your P&L ratio. How do you find that sweet spot, to maximize your profits?
The MACD allows us to use past history to predict the duration of the current trend, and exit when it is most necessary.
-How To Apply The MACD And Gain Its Benefits-
Now that we have gone over exactly what the MACD offers, it is time to learn how to use it.
the MACD consists of 4 components:
The signal line (slow line)
The “MACD” line (fast line)
The baseline
The histogram (a visual, often color coded representation of both lines interacting)
These four components interact with each other in a very dynamic way, and allows for very versatile, wave-like movement (one of the only of its kind.) This is incredibly useful, as the market itself works in a very similar wave-like pattern of thrusts and rest, thrusts and rest and so on. there aren’t many other indicators (if any) that display the markets ebb and flow quite like the MACD. Let's break down what each aspect does.
-The Signal Line-
The signal line or ‘slow line’ is calculated based on the 26-period ema. This is the standard numerical value for the MACD, but can typically be adjusted in it’s settings to your preference. The signal line is the basis for whether a trend is overbought/ oversold and whether the momentum is bullish/ bearish.
-The MACD Line (fast line)-
The MACD line is calculated based on the 12-period ema. When the MACD line crosses above the signal line, this is considered the very beginning of a bullish movement. Why is this the case? Well, if the average price of the past 12 candles is moving higher than the average price of the past 26 candles, we can assume that in the short term, the momentum is bullish.
The opposite is also true. when the MACD line is below the signal line, this is the very beginning of a bearish movement.
-The Baseline-
The baseline is considered the very center of the MACD indicator. It is the line where the red and green bars of the histogram meet and where the scale on the right hand side reads zero. The purpose of the baseline is to further indicate the distance between the signal and MACD line.
the higher above the baseline the MACD and signal line go, the further the distance is between the two (meaning the 12-period ema is much higher than the 26-period ema.) This is useful in showing how overbought or oversold the equity is in that particular time frame.
The opposite is also true. the lower below the baseline these lines move, the further apart they are. However, in this case, the 12-ema is much lower than the 26-period ema. This indicates that the price may be oversold.
-The Histogram-
The histogram is the bread and butter of this entire indicator. As you become more familiar, the signal and MACD line will be very helpful in seeing the nuances of a movement and the market as a whole. As a beginner though, the histogram is your best friend. it takes all of the information mentioned previously, and compacts neatly into a color coded, numerical value system.
Each bar of the histogram corresponds to the above candle. This is useful as it allows us to predict future histogram bars, and where the MACD may be headed in the future.
Whenever the MACD line crosses above the signal, the histogram turns green. whenever the MACD line crosses below the signal, the histogram turns red. As the MACD approaches the signal line, the histogram weakens, and the bars grow smaller and smaller - closer and closer to the baseline. However, as the MACD line separates from the signal, the histogram bars grow larger and larger, further from the baseline.
-The Culmination-
All of this information can be combined, to assess the MACD on multiple time frames and make an educated decision on market direction.
A trading plan using the MACD could look something like this (using SPY):
-Before the market opens, check hourly MACD. wait until the hourly looks oversold, and the histogram appears to have peaked. (once the newest histogram bar is shorter than the previous, this marks the peak)
-Once peaked, this indicates that momentum for the next several hours should return to the baseline (spy is oversold)
-Now, you could go to lower time frames such as the 5 and 15 minute, keeping in mind that the hourly is oversold, so buying pressure should be at its heaviest now.
-Use the MACD on the lower time frames to judge the smaller thrust and rest periods, buy at the rests and sell at the thrusts.
Don't even get me started on how I view a chart as a collection of emotions, and how I believe the MACD displays these emotions better than any other indicator can (we'll save that for a separate post.) The MACD and its strategies/ nuances could be talked about for hours, but I hope this helped. I'll likely be doing another post, outlining more concrete examples of how to use it, so stay tuned!
It is easily one of my personal favorite indicators, and one that I currently use when scalping and day trading.
Now before we get into how the MACD works on a technical level, let’s first go over how the MACD helps us fundamentally.
We can break it’s benefits down into 4 categories - in which it allows us to measure and predict the following:
The strength of a pattern
The momentum of a movement
The direction of a movement
The duration of a movement
Let’s breakdown each of those
-The Strength Of A Pattern-
Have you ever seen price approach the outer limits of a wedge, channel, or support / resistance and wondered, cluelessly whether or not it would actually break through or end up rejecting?
The MACD allows us to predict the pressure behind a certain sentiment, and therefore predict the odds of that pattern completing successfully. (possible example)
-The Momentum Of A Movement-
When trading, especially day trading, it is important to have almost impeccable timing for entries and exits. The MACD allows us to see and predict current and future momentum. This is powerful, as it allows us to enter a long before the rest of the market has gone long (essentially entering a long before the market pumps.)
This increases our profit/loss ratio - therefore decreasing risk and allowing for more sturdy stop losses.
-The Direction Of A Movement-
This one is quite obvious when looking at the MACD, but without the indicator, it can sometimes be quite difficult to even see which way the market is trending (periods of high consolidation for instance)
By utilizing the MACD on multiple time frames, we can have a glimpse of where the market is headed, even if it is unknown on the smaller time frames. (the opposite is also true, when the higher time frames are in periods of high consolidation, we can take a look at the lower time frames to get an idea of where it is heading)
-The Duration Of A Movement-
As mentioned previously, it is extremely important as a day trader to have very accurate entries and exits. Ironically, one of the most difficult things for a novice trader to predict is an accurate exit.
if you exit too early, you miss out on valuable profits and further decrease your profit to loss ratio. Yet, if you exit too late, you also lose valuable profits and decrease your P&L ratio. How do you find that sweet spot, to maximize your profits?
The MACD allows us to use past history to predict the duration of the current trend, and exit when it is most necessary.
-How To Apply The MACD And Gain Its Benefits-
Now that we have gone over exactly what the MACD offers, it is time to learn how to use it.
the MACD consists of 4 components:
The signal line (slow line)
The “MACD” line (fast line)
The baseline
The histogram (a visual, often color coded representation of both lines interacting)
These four components interact with each other in a very dynamic way, and allows for very versatile, wave-like movement (one of the only of its kind.) This is incredibly useful, as the market itself works in a very similar wave-like pattern of thrusts and rest, thrusts and rest and so on. there aren’t many other indicators (if any) that display the markets ebb and flow quite like the MACD. Let's break down what each aspect does.
-The Signal Line-
The signal line or ‘slow line’ is calculated based on the 26-period ema. This is the standard numerical value for the MACD, but can typically be adjusted in it’s settings to your preference. The signal line is the basis for whether a trend is overbought/ oversold and whether the momentum is bullish/ bearish.
-The MACD Line (fast line)-
The MACD line is calculated based on the 12-period ema. When the MACD line crosses above the signal line, this is considered the very beginning of a bullish movement. Why is this the case? Well, if the average price of the past 12 candles is moving higher than the average price of the past 26 candles, we can assume that in the short term, the momentum is bullish.
The opposite is also true. when the MACD line is below the signal line, this is the very beginning of a bearish movement.
-The Baseline-
The baseline is considered the very center of the MACD indicator. It is the line where the red and green bars of the histogram meet and where the scale on the right hand side reads zero. The purpose of the baseline is to further indicate the distance between the signal and MACD line.
the higher above the baseline the MACD and signal line go, the further the distance is between the two (meaning the 12-period ema is much higher than the 26-period ema.) This is useful in showing how overbought or oversold the equity is in that particular time frame.
The opposite is also true. the lower below the baseline these lines move, the further apart they are. However, in this case, the 12-ema is much lower than the 26-period ema. This indicates that the price may be oversold.
-The Histogram-
The histogram is the bread and butter of this entire indicator. As you become more familiar, the signal and MACD line will be very helpful in seeing the nuances of a movement and the market as a whole. As a beginner though, the histogram is your best friend. it takes all of the information mentioned previously, and compacts neatly into a color coded, numerical value system.
Each bar of the histogram corresponds to the above candle. This is useful as it allows us to predict future histogram bars, and where the MACD may be headed in the future.
Whenever the MACD line crosses above the signal, the histogram turns green. whenever the MACD line crosses below the signal, the histogram turns red. As the MACD approaches the signal line, the histogram weakens, and the bars grow smaller and smaller - closer and closer to the baseline. However, as the MACD line separates from the signal, the histogram bars grow larger and larger, further from the baseline.
-The Culmination-
All of this information can be combined, to assess the MACD on multiple time frames and make an educated decision on market direction.
A trading plan using the MACD could look something like this (using SPY):
-Before the market opens, check hourly MACD. wait until the hourly looks oversold, and the histogram appears to have peaked. (once the newest histogram bar is shorter than the previous, this marks the peak)
-Once peaked, this indicates that momentum for the next several hours should return to the baseline (spy is oversold)
-Now, you could go to lower time frames such as the 5 and 15 minute, keeping in mind that the hourly is oversold, so buying pressure should be at its heaviest now.
-Use the MACD on the lower time frames to judge the smaller thrust and rest periods, buy at the rests and sell at the thrusts.
Don't even get me started on how I view a chart as a collection of emotions, and how I believe the MACD displays these emotions better than any other indicator can (we'll save that for a separate post.) The MACD and its strategies/ nuances could be talked about for hours, but I hope this helped. I'll likely be doing another post, outlining more concrete examples of how to use it, so stay tuned!
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.