MACD Indicator - Your Multifunctional Indicator
When you ask traders to name a good technical analysis indicator, no matter if they are newbies or professionals, they will undoubtedly mention the MACD indicator. MACD is one of the widely-used indicators that has many advantages.
The crucial benefit is that it gives many signals and can be used in different circumstances. Moreover, it’s free and doesn’t require any downloading. You can simply find it in MetaTrader and apply it to your chart. Let’s take a closer look at the best indicator’s implementation.
What Is the MACD Indicator?
MACD stands for Moving Average Convergence Divergence. It’s a momentum indicator that follows the trend and shows the correlation between two moving averages of the asset’s price.
Here, we need to clarify what the momentum indicator is. A momentum indicator calculates the change or speed of the price movement of the asset.
MACD indicator was developed by Gerald Appeal in the late 1970s. If the indicator is used for so many years, we don’t need any other proof of its effectiveness.
Look at the picture below. The MACD indicator consists of 2 lines: MACD and signal line, and one histogram (bars). A histogram is used to show the difference between the fast and slow moving average. Thus, when the distance between EMAs increases, the histogram rises. It’s called divergence. As soon as moving averages get closer, the histogram reduces. It’s called convergence. This explains why the indicator is called the Moving Average Convergence Divergence.
Calculation of Moving Average Convergence Divergence
The formula of the MACD is simple. MACD is a subtraction of the 26-period Exponential Moving Average (EMA) from the 12-period EMA.
MACD = 12-period EMA – 26-period EMA
If you don’t know what the Exponential Moving Average is, there is a simple explanation. EMA is the moving average that puts a greater weight on the most recent price points. That helps this type of moving average to stronger react to the recent price changes.
However, when setting the MACD indicator, you will see three numbers. For example, 12, 26, and 9, which are default settings. As we said above, MACD is the 12-period EMA minus 26-period EMA. MACD signal line is the 9-period EMA. MACD histogram is the MACD minus the MACD signal line.
How to Implement the MACD Indicator
This indicator is a standard tool in MetaTrader. That means you don’t need to buy it or download it additionally:
- Go to MetaTrader
- Click Insert – Indicators – Oscillators
- Pick MACD
If you use any other platform, it’s likely that the indicator will be set by default. If not, you can always download it for free.
In the settings window, you can change the periods of the moving averages price, from close to open, high, low, and, of course, style. We would recommend you keep the close price. Also, you can change the MA periods. Remember that longer periods are better for bigger timeframes, while shorter periods are better suited to smaller ones.
We can say that the MACD indicator is one of the oldest, most effective, and easiest indicators you can apply for profitable trading. The most significant advantage is that it is multifunctional. If you read our article carefully, you remember that there are four situations when the indicator gives signals. Compare this number to other technical indicators, and you will understand that it’s a lot. The indicator can easily be applied to any timeframe. Thus, you can use it for any of your trading strategies.
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