The MACD indicator is capable of recognizing opportunities across a wide range of financial markets. Understanding how to enforce the tool is critical to a forex trader’s success. Read on to understand some of the common moving average convergence divergence strategies you can use.
How does MACD Operate?
The moving average convergence divergence indicator operates through three components. These are a histogram and two moving averages. When two moving averages integrate the process is referred to as converging.
When they grow apart, however, they are said to be diverging. The difference between the two moving average lines is defined on the histogram. If the MACD was to trade over the zero lines, it would indicate an uptrend. Should the MACD fall below the previous position then the indicator would be used to validate a downtrend.
If the market starts trending upwards to a point of hitting higher lows and highs and breaking crucial resistance levels, traders could enter long positions. Forex traders may choose to enter a short position in case the asset was in a downtrend, defined by the lower lows and lower highs, or even support level recesses.
MACD Trading Strategy you can Consider
Finding the trend is one of the most critical steps that each technical trader must handle during their trading activities. This concept may seem difficult but the MACD can come in handy to make the process easier. Here are steps to help you identify and enter a trend through MACD.
Determine the trend direction
Forex traders can determine a trend by leveraging the 200-day MA (moving average). If a trader is seeking to buy into a position, they can implement the 200-day MA to the price chart, to figure out whether prices are trading over the average range consistently.
Utilize MACD zero line for risk management
Utilize MACD crossover to facilitate opportunities on the trend direction. After determining the trading bias, traders will start searching for buy signals in a direction similar to the current trend.
Leverage MACD Zero Line to Manage Risk
When trading trends, a trader should understand that they will come to an end after all. Whenever a bearish crossover occurs during an uptrend such as USD/EUR, it could be an indication of a slowdown in the uptrend momentum.
It could also indicate a change in direction. If a trader has a long position, in this case, they can start looking for an exit position. Still, it could be a short-lived pullback. When there is a bearish crossover, traders can identify the indicator line to cross under the zero line. Such an action could be a confirmation of a downward trend. At this point, a trader can consider exiting the trade.
The histogram is one of the most crucial parts of the moving average converging-diverging indicator. The bars are representative of the difference between signal lines and the MACD. If the market price is advancing, the histogram increases height-wise. If the histogram shrinks, however, it is an indication that the market is moving slower. This means that as the histogram bars advance further from the zero, the two MA lines are progressing further apart.
When the initial advancement phase is complete, a projection shape emerges, which is an indication that the advancing averages are toughening once more. This could indicate a crossover is looming. The histogram reversal is a leading strategy that is based on utilizing popular trends to facilitate position placement. This means that traders can execute the strategy before market fluctuation occurs.
When is the Best Time to Utilize MACD?
When it comes to the moving average converging-diverging indicator, there is no perfect time when you can use it. Traders have the liberty to determine when they wish to use it based on their trading plan and personal preferences. Some traders may have no suitable time to utilize the MACD indicator, especially if they don’t perceive analysis from a technical point of view. They can even choose to use various other indicators to figure out price action.
The best time to MACD will depend on your preferred strategies. For example, if you choose a lagging strategy you would need to be monitoring your MACD indicator often to receive signals as fast as possible. However, should you opt for the leading strategy such as the histogram; you could spend less time observing your MACD because the signals will show up beforehand.
It’s worth noting that no technical tool is capable of predicting accurately. Again, no trading system eliminates risks while guaranteeing profits. Traders should understand that while the MACD comes with numerous strengths, it also has some downfalls. Use other technical tools to validate signals that MACD generates.