The MACD has remained one of the most popular trading indicators in technical analysis over the past 40 years…
It can look complicated and intimidating at first, so in this article I thought I’d give away some of the best MACD trading tactics for beginners.
MACD is an acronym for moving average convergence divergence.
The indicator was developed by Gerald Appel and is discussed in his book called “The Moving Average Convergence Divergence Trading Method.”
In a nutshell, the MACD is a trend momentum indicator that’s a refinement of the two moving averages, and it measures the distance between the two moving average lines…
MACD Trading Tactics for Beginners: Understanding the Indicator
Once we take the MACD apart, you’ll soon realize that it’s a basic indicator and easy to understand once you’re familiar with it.
The MACD turns two trend-following indicators, or the moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter one.
So by the end of learning these MACD trading tactics for beginners, you’ll see this indicator offers the best of both worlds: trend following and momentum.
3 Separate Components of the MACD Trading Indicator
The first thing you need to learn are the basic components that make up the indicator.
You need to become familiar with these components so the MACD graph makes sense to you, so be sure to pay attention to the example below because it lays out the foundation for next section.
The MACD is made up of three basic components.
The chart below will show you exactly where each of the three components are located so you can start to see how the MACD is integrated together.
The first line is the MACD line. It’s formed by subtracting the 26-bar exponential moving average indicator from the 12-bar EMA indicator.
The second line you want to pay attention to is the signal line.
This line is simply the 9-bar EMA of the MACD line. The purpose of this line is to smooth out the daily ups and downs of the MACD line.
Finally, the last and most visual part of the MACD is the histogram. The histogram is the difference between the MACD line and the signal line.
You can also see in this example below how the MACD line fluctuates up and down just as soon as the moving averages move closer together, and further apart from each other.
I’m showing you this example because I want you to understand the basic MACD trading tactics for beginners and how they work together.
I turned on the EMA indicator for this example to make things a bit clearer to understand.
There are three separate scenarios on this chart that I want you to notice…
First, do you see how the fast- and slow-moving averages come together on the upper part of the chart when the MACD is exactly at the zero center line?
The MACD is just the difference between the two EMA’s.
If there’s no difference between the two, then the MACD will be at the zero line.
Then notice how fast the 12-bar EMA moves above the 26-bar EMA, and the MACD moves above the zero line.
That’s because the MACD is the difference between the two EMAs. And when the 12-bar EMA is above the 26-bar EMA, a positive number is produced and the MACD will be above the zero line.
But when the fast 12-bar EMA is below the 26-bar EMA, the difference between the two bars will be negative…
And will cause the MACD to move below the zero line.
Signal Line Crossovers
One of the most basic MACD trading tactics for beginners is signal-line crossovers.
This method tends to work well with volatile markets that trend often, such as foreign currencies, tech stocks and volatile ETFs.
The signal line is just a 9-day EMA of the MACD Line.
As a moving average of the indicator, it slowly follows the MACD. A bullish crossover occurs when the MACD turns up and crosses above the signal line.
A bearish crossover occurs when the MACD turns down and crosses below the signal line.
Once the crossover occurs, you want to make sure both lines gain as much distance apart from each other as possible. This is a good sign that momentum is continuing in the desired direction.
The MACD is a great indicator, but it’s also intimidating for many beginners.
So I hope these MACD trading tactics for beginners get rid of any reservations you have about using the indicator.
For more information on similar topics, check out these two articles: What Is the VIX? Understanding Stock Market Volatility and The 4 Principles of Momentum Trading.
Senior Strategist, WealthPress