MACD Indicator Explained: 4 Advanced Strategies
Summary
TLDRThis video offers a comprehensive guide to the MACD indicator, ideal for both beginners and advanced traders. It explains the MACD's components (MACD line, signal line, and histogram) and demonstrates various uses such as histogram slopes, crossovers, zero-line pullbacks, and divergences. Additionally, it presents four advanced trading strategies combining MACD with other concepts like support and resistance, Bollinger Bands, EMA bands, and swap zones. The video aims to enhance trading skills by identifying trade opportunities and applying these techniques in different market conditions.
Takeaways
- 📈 The MACD (Moving Average Convergence Divergence) indicator is used to identify trends and price momentum, consisting of three components: the MACD line, signal line, and histogram.
- 🔍 The MACD line is calculated by subtracting a 26-period EMA from a 12-period EMA, indicating the relationship between short-term and long-term trends.
- 📊 The signal line, a 9-period EMA of the MACD line, serves as a trigger for potential entry points through crossovers.
- 📊 The histogram represents the difference between the MACD line and the signal line, providing insights into the strength and direction of the trend's momentum.
- 📉 An expanding histogram indicates growing momentum in the direction of the trend, while a shrinking histogram suggests weakening momentum and potential trend reversal or sideways movement.
- 🔄 MACD crossovers can provide early signs of trend reversals and better entry points compared to traditional moving average crossovers.
- 🔢 Zero line crossovers by the MACD line indicate shifts in trend momentum and potential trend changes, offering fewer false signals than standard crossovers.
- 🔄 Zero line pullbacks in strong trends can be used to identify high-probability trade entries when the MACD line interacts with the zero line.
- 🔄 Divergence occurs when price action and the MACD histogram show conflicting signals, often signaling a potential trend reversal.
- 📉 Bearish divergence indicates weakening buying pressure, while bullish divergence suggests fading selling pressure, both being potential reversal signals.
- 📈 Advanced strategies combining MACD with other concepts like support/resistance, Bollinger Bands, EMA bands, and swap zones can enhance trading decisions in various market conditions.
Q & A
What is the purpose of the MACD indicator?
-The MACD (Moving Average Convergence Divergence) indicator is used to identify trends and momentum of the price in the financial markets.
What are the three components of the MACD indicator?
-The three components of the MACD indicator are the MACD line, the signal line, and the histogram.
How is the MACD line calculated?
-The MACD line is calculated by subtracting the 26-period EMA (Exponential Moving Average) from the 12-period EMA.
What does the signal line represent in the MACD indicator?
-The signal line is a nine-period EMA of the MACD line and is used to provide crossovers as an entry trigger for trades.
How does the histogram in the MACD indicator reflect the price's momentum?
-The histogram calculates the distance between the MACD line and the signal line, reflecting the momentum of the price. Green bars above the zero line indicate an uptrend, while red bars below indicate a downtrend.
What does the slope of the histogram indicate about the trend strength?
-An expanding histogram indicates a strong trend with growing momentum, while a shrinking histogram suggests that the trend is losing momentum and may reverse or move sideways.
How can the MACD crossover be used as an early sign of a reversal?
-The MACD crossover can provide an early indication of a reversal by showing when the MACD line crosses the signal line, which can happen before the price moves significantly.
What is a zero line crossover in the context of the MACD indicator?
-A zero line crossover occurs when the MACD line crosses above or below the zero line, indicating a potential shift in trend and momentum.
What is a Divergence in the context of the MACD indicator and why is it significant?
-A Divergence occurs when the price and the MACD give different outputs, such as a lower low in price with a higher low in the MACD (bullish divergence) or a higher high in price with a lower high in the MACD (bearish divergence). It is significant as it can signal an impending trend reversal.
How can the MACD indicator be combined with other concepts to create advanced trading strategies?
-The MACD indicator can be combined with concepts like support and resistance, Bollinger Bands, EMA bands, and swap zones to create advanced trading strategies that can be used in different market conditions.
What is a swap zone and how is it used in trading strategies with the MACD indicator?
-A swap zone is a level that changes its role from resistance to support or vice versa after a breakout. It is used in trading strategies with the MACD indicator to identify potential reversal areas where the price may bounce back after a pullback to the swap zone.
Can you provide an example of a trading strategy using the MACD indicator with Bollinger Bands?
-One strategy involves looking for a bearish or bullish Divergence on the MACD while the price is outside the Bollinger Bands. A sell trade entry might occur when the price closes back inside the bands after a bearish Divergence, and a buy trade entry might occur when the price closes above the lower band after a bullish Divergence.
How are EMA bands used in trend-following strategies with the MACD indicator?
-EMA bands, calculated on the highs, closes, and lows of the candles, provide dynamic support and resistance levels. In an uptrend, a pullback to these bands followed by a MACD line crossing above the zero line can signal a buy entry. Conversely, in a downtrend, a pullback to the bands followed by a MACD line crossing below the zero line can signal a sell entry.
Outlines
📈 Introduction to MACD Indicator Guide
This paragraph introduces a comprehensive guide to the MACD (Moving Average Convergence Divergence) indicator, tailored for traders of all levels. It outlines the video's content, which includes the basics of the MACD, its components (MACD line, signal line, and histogram), and its application in identifying trade opportunities through techniques like histogram slope, crossovers, zero line pullbacks, and divergences. The guide also promises to combine MACD with other concepts to form advanced strategies for trading reversals and trends.
📊 Understanding MACD Components and Market Conditions
This section delves into the MACD indicator's components, explaining how the MACD line is derived from the difference between two exponential moving averages (EMAs), the signal line as a smoothed version of the MACD line, and the histogram as a visual representation of momentum. It discusses how to interpret the histogram's slope and color changes to gauge market trends and potential trade entries or exits. The paragraph also emphasizes the importance of not relying solely on the MACD for trade decisions, suggesting that it will be combined with other factors in advanced strategies.
🔄 MACD Crossover and Zero Line Applications
The paragraph explores the use of MACD crossovers as an early sign of potential trend reversals, offering better entry points and tighter stop losses compared to traditional moving average crossovers. It also explains the concept of zero line crossovers, which indicate shifts in trend and momentum, and the use of MACD pullbacks to the zero line in strong trending markets as potential entry points for trades. The importance of confirming these signals with additional factors is highlighted to avoid false signals.
🔄 Divergence as a Reversal Signal
This section introduces the concept of divergence as a powerful tool for spotting trend changes. Divergence occurs when there is a discrepancy between the price action and the MACD indicator, signaling potential exhaustion of momentum and a likely reversal. The paragraph differentiates between bullish and bearish divergences, providing examples of each and emphasizing the importance of identifying clear and obvious divergences for high-probability trades.
🚀 Advanced MACD Trading Strategies
The paragraph outlines four advanced trading strategies that incorporate the MACD indicator. The first two strategies focus on reversal setups, combining divergence with support and resistance levels or Bollinger Bands, to identify high-probability trade entries. The latter two strategies are trend-following, using EMA bands and swap zones in conjunction with the MACD to capitalize on pullbacks in strong trends. Each strategy is designed to address different market conditions, providing a versatile approach to trading with the MACD indicator.
📉 Final Thoughts on Trading with MACD
In the concluding paragraph, the video summarizes the uses of the MACD indicator and the four advanced trading strategies discussed. It invites viewers to share suggestions for future topics and to provide feedback on the video. The paragraph also encourages viewers to like, subscribe, and follow the channel on Instagram for more content, emphasizing the value provided and the desire for viewer engagement.
Mindmap
Keywords
💡MACD
💡EMA
💡Histogram
💡Crossover
💡Divergence
💡Support and Resistance
💡Bollinger Bands
💡Zero Line
💡EMA Bands
💡Swap Zones
Highlights
The MACD indicator is used to identify trends and momentum of the price.
MACD stands for Moving Average Convergence Divergence.
The MACD indicator consists of three components: the MACD line, the signal line, and the histogram.
The MACD line is calculated by subtracting the 26 period EMA from the 12 period EMA.
The signal line is a nine period EMA of the MACD line, providing entry triggers through crossovers.
The histogram reflects the distance between the MACD line and the signal line, indicating momentum.
Histogram slope and expansion can signal growing or weakening momentum and potential trend direction.
MACD crossovers can provide early signs of reversal and better entry points than traditional moving averages.
Zero line crossovers by the MACD line indicate shifts in trend and momentum.
Divergence occurs when price and MACD give different outputs, signaling potential trend changes.
Bullish divergence suggests weakening sellers' momentum, while bearish divergence indicates weakening buyers' momentum.
Combining MACD with support and resistance levels can create high-probability reversal setups.
Bollinger Bands combined with MACD Divergence can indicate reversals when price moves outside the bands.
EMA bands created from highs, closes, and lows can provide support and resistance in trending markets.
Swap zones, where support and resistance levels swap roles, can be used with MACD for pullback trades.
Four advanced MACD strategies are discussed for trading reversals and trends in different market conditions.
Divergence should be clear and obvious to the naked eye for reliable trading signals.
Transcripts
in this video we have collected
information from various sources to
provide a complete guide to the macd
indicator
we created this video course for the
Trader at entry level so if you are a
beginner or an advanced Trader watch the
full video to grasp every Concept in
detail
here are the topics covered in this
course
we will cover the basics of the macd
indicator including what it is and how
it works
we will accomplish this by understanding
the components of the macd such as the
macd line signal line and histogram
next we will dive deep into the uses of
the macd indicator including the
histogram slope crossovers zero line
crossovers zero line pullbacks and
divergences
you will learn how to use these
techniques to identify trade
opportunities
finally we will combine the uses of macd
with other Concepts to create four
Advanced strategies you can use to trade
different market conditions
you will learn how to use the macd to
trade reversals and trends
so without any further Ado let's get
started
what is the macd indicator
macd stands for moving average
convergence Divergence it is used to
identify Trends and momentum of the
price
the macd indicator consists of three
components the macd line the signal line
and the histogram
let's understand each of these
components in detail
first let's start with the macd line
the macd line is calculated by
subtracting the 26 period EMA from the
12 period EMA
this means that whenever the 12 EMA is
above the 26 EMA the macd line will be
above zero
when the 12 EMA moves below the 26 EMA
the macd line goes below zero
next we have the signal line
the signal line is a nine period
exponential moving average of the macd
line
the signal line aims to provide
crossovers as an entry trigger
lastly we have the histogram
the histogram calculates the distance
between the macd line and the signal
line
by doing so it gives us a better
understanding of the momentum
when the macd line is above the signal
line the histogram will show Green bars
above the zero line
this shows us that the price is in an
uptrend
[Music]
on the other hand when the macd line is
below the signal line the histogram will
show red bars below the zero line
so these are the three components of the
macd
we have the macd line the signal line
and the histogram
now let's understand how to use these
components in different market
conditions
use one histogram slope
the slope or shape of the histogram
gives us a deeper understanding of the
trend
when the price is in a strong Trend the
distance between the macd line and the
signal line increases as a result the
histogram expands
an expanding histogram is a sign of
growing momentum
therefore if the histogram is expanding
we should look for entries in the
direction of the trend
as the trend gets weak the histogram
starts to shrink
this is a sign that the momentum of the
move is lost and the price might reverse
or stay sideways
during such times it is better to exit
our trades and wait for the price to
generate momentum again
for a better visual presentation the
macd histogram on trading view has light
and dark colors
we see dark colors when the histogram is
expanding and light colors when the
histogram is shrinking
at the beginning of an up move when you
see two or more dark green bars with an
expanding histogram it is a sign that
the upwards momentum is solid and
growing
therefore it is an excellent opportunity
to look for buying entries
then when the histogram starts to fall
or decrease in size it is time to get
out of the trade
this indicates that the momentum has
decreased and a reversal or a sideways
Trend May establish itself
as you can see the shrinking of the
histogram coincides with this sideways
range
then we have this down move
at the beginning of the down move we see
these dark red bars with an expanding
histogram
if you haven't already this is your last
chance to exit your previous buy
positions
these dark red bars sign that new
sellers have entered the markets and
they are moving the markets with heavy
momentum
it's time to enter new cell trades
then once the price moves a certain
distance the histogram starts to shrink
as we see these light red bars
it is an early indication that the down
move is losing momentum and a reversal
or sideways range May establish itself
and as you can see the price stayed
sideways as the histogram shrank itself
again a point to remember here is that
this is just one use of the macd you
cannot make trade decisions based on
this one factor alone
we will show you how to combine it with
other factors in the advanced strategies
if you are enjoying this video so far
then be sure to hit the like button and
subscribe to our channel to never miss
any of our videos
you can also follow us on Instagram by
clicking the link in the description
below
now moving on to the second use
two crossovers
a lot of Traders like to use the moving
average crossover system for their
trading but crossovers happen only after
a good move in price
as a result our entries are late and the
price has already moved a lot to address
this problem we could use the macd
crossover
the macd crossover can give you an early
sign of a reversal it can also provide
you with better entries and smaller stop
losses
to prove this I have plotted the 12 and
26 EMAs on the chart along with the macd
as you already know the macd is
calculated on the 12 and 26 EMA so this
should be a fair comparison
here is the reversal point
from this point the price reversed from
an uptrend to a downtrend
the crossover for the moving averages
occurred here
so your entry would be on this candle
as you can see the price had already
moved quite some distance before giving
the crossover signal
so ideally your stop loss would be above
this High which is quite a wide stop
loss
but if you look at the macd your entry
signal would be on this candle as the
macd line crossed below the signal line
it gives you a far superior entry price
with a tight stop loss as a result you
capture a bigger portion of the price
move
here is another example we can see that
the 12 EMA crossed above the 26 EMA on
this candle it is a bullish crossover so
a buy entry occurs here
but the crossover happens only after the
price has moved a certain distance on
the other hand the macd crossover
occurred here giving us a far better
entry price
as a result we captured a good portion
of this move with a tighter stop loss
macd crossovers can be an early sign of
reversal but they generate far more
false signals so we can't use these
crossovers in isolation a more confirmed
signal is the zero line crossover
foreign
use three zero line crossover
the macd consists of a zero line which
is known as the midpoint of the
indicator when the 12 EMA crosses below
the 26 EMA the macd line moves below the
zero line
this shows that the trend and momentum
have shifted downwards and a downtrend
may start
similarly when the 12 EMA crosses above
the 26 EMA the macd line moves above the
zero line
this shows that the trend and momentum
have shifted upwards and the price may
start an uptrend now
the zero line crossovers give fewer
false signals but again we need to add
more confirmations for them to be high
probability trades
use 4 zero line pullbacks
in strong trending markets the macd line
will often pull back to the zero line
and the price will bounce back
so in an uptrend if the macd line pulls
back to the zero line it is a good place
to make buy trades but again we cannot
randomly buy whenever the macd line
reaches zero
we must wait for the macd line to cross
above the signal line to make a Buy
trade
similarly in a downtrend if the macd
line pulls back to the zero line it is a
good place to make cell entries
we wait for the macd line to cross below
the signal line we enter on the
crossover
now moving on to the last use
5 Divergence
Divergence is a sign of reversal and it
can be very helpful in spotting Trend
changes
a Divergence occurs when the price and
the macd give different outputs
we will use the histogram to spot these
divergences
divergences are of two types A bullish
Divergence and a bearish Divergence
a bullish Divergence occurs when the
price makes a lower low but the macd
makes a higher low
this shows that the momentum on the last
down move was lesser than the prior down
move
it is a sign that the sellers are tired
and the price will likely stall or
reverse
here is an example
here the price was in a downtrend the
price created these three lower lows
each low being lower than the previous
one
however the macd makes higher lows this
is a clear Divergence it shows that the
sellers are losing their strength and a
reversal may occur so this becomes a
good Buy Signal
[Music]
now let's understand the bearish
Divergence
a bearish Divergence occurs when the
price makes a higher high but the macd
makes a lower high
this shows that the momentum on the last
up move was lesser than the prior up
move
it is a sign that the buyers are tired
and the price will likely stall or
reverse
here's an example
here the price was initially in an
uptrend
the price makes a higher high but on the
macd we see lower highs this is a clear
bearish Divergence it is a sign that the
buyers are losing momentum and strength
as a consequence the sellers might jump
in and take these prices downwards
a lot of Traders find it difficult to
find entries on divergences but don't
worry we will show you our special
technique in the strategies section
a quick note about Divergence only look
at divergences if they are clear and
obvious it should be apparent to the
naked eye
here is an example
here the price made this higher high but
on the macd we have a lower Highs but
the Divergence is not very clear on the
macd
these two tops seem equal to the naked
eye
we need a close examination to see if
the second top is lower than the first
so the best thing to do here is to avoid
such divergences
on the other hand this was a clear
Divergence
the price makes higher Highs but the
macd makes lower highs we should look
for these types of divergences
divergences that are obvious to the eye
can be very powerful so these were the
five uses of the macd indicator
now let's discuss the strategies that
can be created around the macd indicator
the first two strategies are reversal
setups
while the last two are Trend following
setups
these four strategies will enable you to
trade the markets in any condition
you can use these reversal setups when
the price is in a range-bound market
and during strong Trends the trend
following strategies will help you catch
pullbacks
strategy one
Divergence plus support and resistance
as we already discussed Divergence is a
strong sign of reversal but we cannot
trade every Divergence
we need to identify potential reversal
areas and wait for the macd to create
Divergence around those areas
for this we will use the concepts of
support and resistance
we will first identify the support and
resistance levels on a higher time frame
then wait for Divergence on a lower time
frame
here is an example
we have the GBP USD pair on the four
hour chart
the price made an up move and then
reversed so we plot a level of
resistance here
when the price arrives near the
resistance for the second time we expect
the price to reverse downwards again
so we switch to a one hour chart to look
for Divergence
here is the same price action on a one
hour chart
we see that the price made a higher high
coming into the resistance level
but on the macd we see lower highs
this is a clear and obvious bearish
Divergence
it tells us that the buyers have lost
momentum coming into the resistance
we have a Confluence of a resistance
level with Divergence
this is a high probability trade
therefore we should look out for a sell
trade
for our entry we need to identify the
lowest point between the tops on the
macd
these are the two tops
here is the lowest point between them we
draw a line at that bar
then we wait for the histogram to break
below that line
on this bar the histogram breaks below
the line
so we enter a sell trade on the
corresponding candle
as you can see we saw a steep down move
after our entry
here is an example of a buy setup
we have the USD JPY on a four hour chart
this upside reversal helped us identify
this support level
when the price returns to this level we
expect the price to find support and
move upwards
so we switch to a one hour time frame
and look for a bullish Divergence
the price makes a lower low coming into
the support Zone
but on the macd we see a higher low
this is a clear and obvious Divergence
it shows us that the sellers have lost
their strength and momentum in this down
move so we identify this as a high
probability trade setup
now we Mark the highest point between
the bottoms on the macd and draw a line
on this bar the histogram breaks above
the line and it is a Buy Signal so we
buy here
as you can see the price made an up move
and touched the most recent highs
so this is how to use the Divergence
with concepts of support and resistance
now let's look at the second strategy
strategy two Divergence plus Bollinger
Bands
Bollinger Bands are a very popular
indicator that Traders use to trade
reversals
the theory is this
ninety percent of the time the price is
expected to stay Within These bands
so whenever the price moves outside the
bands we can expect the price to reverse
and return inside
if the price moves above the upper band
we expect it to reverse downwards
similarly if the price moves below the
lower band we expect the price to
reverse upwards
we will combine this analogy with the
macd Divergence
but first we will go over the Bollinger
band settings and change the length to
200. we will keep the standard deviation
to two
this gives Bollinger Bands on the 200
moving average
here is a cell setup using this strategy
here we see that the price was in an
uptrend
the trend was so strong that the price
stayed above the upper Bollinger band
for an extended period
now we expect the price to move lower
so we look for a bearish Divergence
here the price made a higher high but
the macd histogram made a lower high
in fact on the second top we don't even
see a green bar
this is a great sign that the sellers
have grabbed hold of the markets and the
price will follow soon so a selling
opportunity presents itself
for this strategy our entry occurs on
the first candle that closes back inside
the Bands
so this will be our entry candle
and as you can see the price made a
solid down move after our entry
moving on to buy trade
initially we saw a massive down move
that stayed below the lower band
the price spends a lot of time below the
band we know that the price cannot spend
so much time outside the bands so we are
already expecting a reversal to the
upside
towards the end of the move we see the
price was constantly making lower lows
but the macd histogram was plotting
higher lows this was a clear and obvious
Divergence we have a combination of the
Bollinger Bands and the macd Divergence
it indicates that the sellers have lost
all momentum coming into the down move
the buyers are pushing hard and an
upwards reversal may occur soon
so we should look for a Buy trade
our buy entry occurs as the price closes
above the lower band on this candle
as you can see the price shot up after
our entry
so this was a unique way of trading macd
Divergence with Bollinger Bands
now moving on to the trend trading
strategies
strategy 3 EMA bands plus zero line
pullbacks
for this strategy we will need four
indicators we need the macd and the
three exponential moving averages
all three of them are 200 EMAs but with
different sources
the upper EMA is calculated on the highs
of the candles
the middle EMA is calculated on the
close and the lower EMA is calculated on
the lows
for trading view users you can use the
moving average ribbon indicator
just go to the indicators section and
search moving average ribbon select this
indicator
and change the settings to the following
once done your chart should look
something like this
now we have these moving average bands
that will help us identify trade
opportunities when the price is trending
these bands will provide support and
resistance to the price
in an uptrend we often see that the
price pulls back to these moving
averages and finds support
similarly in a downtrend the price pulls
back to these moving averages and finds
resistance
a point worth remembering here is that
price will not always bounce exactly
from the Bands sometimes the price goes
deeper before reversing
now let's combine this with the macd and
create a strategy here is a buy setup
the price made a strong up move here
the price stayed above the bands and the
bands were sloped upwards
this is a sign that the price is in an
uptrend
then the price pulls back to the EMA
bans
now we expect the price to find support
here and move upwards
we also see that the macd line has
crossed below the zero line
in an uptrend we expect the price to
bounce after the macd touches the zero
line
this is also a sign that the pullback
might be over and that the price May
resume the uptrend again
so now we have a confirmation of the
macd and the EMA bands
for our entry we will not use the macd
line crossover macd crossovers are good
for reversals but they are not so good
for pullbacks
most of the time they will provide a
late entry in pullbacks
for a better entry we will create a
short-term trend line on the pullback
and enter on its Breakout
as you can see the price made a strong
up move after our entry
here is a sell trade
we see that the price was consistently
trading below the EMA bans and the bans
were sloped downwards
this is a sign that the price was in a
strong downtrend
price pulls back to the Bands
we expect the price to find resistance
at these bands and move lower
we also see that the macd has crossed
above its zero line
this also indicates that the price may
start a down move again
therefore we have a Confluence of the
macd and the EMA bands
now we create a short-term trend line
and wait for the price to break it
on this candle the price broke below the
trend line
we enter a sell trade
as you can see the price moved downwards
after our entry
foreign
strategy
strategy 4. swap zones plus zero line
pullbacks
if you trade support and resistance you
might know that the support and
resistance have dual properties
this means a resistance level can become
a support level after a Breakout
similarly a support level can act as
resistance after its breakdown
this is why we call them swap zones they
swap roles with each other
we will use this concept with the macd
to trade this strategy here we see that
the price was in a steady uptrend
we spot this reversal here and plot a
resistance level
then the price broke above the
resistance level
therefore the resistance level has now
turned into a support level
when the price pulls back to the support
level we expect the price to bounce and
move upwards
we also see that the macd line is below
zero showing signs of support
we spot this doji right at the support
level and enter a Buy trade
and as you can see the price shoots up
and trades higher
here is a sell trade
here the price was in a downtrend as it
moved lower
this reversal Point helped us identify a
support level
then the price broke below it turning
the support into a resistance level
when the price pulls back to the
resistance level we expect the price to
bounce
we also see that the macd has moved
above the zero line
so we enter a sell trade when we see
this evening star Candlestick pattern
and as you can see the price moved lower
so this is how you trade using the macd
in this video we first understood the
uses of the macd indicator
then we discussed four Advanced trading
strategies using it
if you want us to cover some specific
topics be sure to comment below as we
appreciate your suggestions also let us
know what you think about this video
if you found value in this video then be
sure to hit the like button and
subscribe to our channel so you don't
miss any of our new videos you can also
follow us on Instagram by clicking the
link in the description below see you
soon
foreign
[Music]
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