Greetings traders and welcome back.
Thank you for joining me again,
as always, Chris here bringing you another Survival Guide.
Today's subject will be the moving average convergence divergence,
otherwise known as the MACD for short.
This is a technical analysis based indicator,
so for those of you that get excited for my TA based indicator
trading sessions here, this one is a special treat for you.
We're going to talk about what the MACD is, where the formula
comes from, as well as how some strategies are derived from
it. Without further ado, let's get going.
The first thing we need to do is apply the darn thing to our chart,
so let's show you how you can do that with the Finamark
platform. We're going to do it by clicking this top center
button, the "show indicators" option as always, but we have to
do something a little bit more different here than what we're
used to with our moving averages.
We need to go down to the bottom right and click "add new
section" where we're then going to come over here to the middle
column, which has more choices now, and we're going to click
on the moving average convergence divergence,
and after that we are good to go.
We've got our self the MACD down on the bottom screen.
Without further ado, let's jump on into it folks.
The first part to understanding what the MACD is is understanding
the different words that make up this acronym, MACD, and that
is moving, average, convergence, divergence.
Here's our "M", "A", "C", "D".
This saves us an awful lot of breath, and this is what
you'll hear to it referred by almost every trader. It's very rare you'll hear
someone say, "moving average convergence divergence", sounding
like the Terminator. What it is, is an oscillator, like we
saw in our main screen here if we switch back over briefly.
What an oscillator is, is something that's moving back and
forth between a centralized point. It is oscillating back and forth.
Now with this information,
it is something that also applies to moving averages that
attempts to indicate the formation of new trends with the
oscillations, as well as the crossing over of each other of the two moving averages.
That's what the MACD is in a nutshell. It was developed by
Gerald Appel in the late 1970's, and over time,
the indicator has established itself as one of the simplest
and most effective technical analysis tools when used correctly.
It's simple in nature as well,
and sometimes simplicity is something that can go a long way in terms of accuracy.
If we're using something correctly, that is often times more
important than using something that may have the ability
to be more correct, but it's more complicated, so we're using it incorrectly.
The MACD is a very strong indicator, especially with those
traders that are working on the Gauntlet Mini. It has some serious potential.
Understanding the MACD can be done by breaking down the formula,
where we have four main points of attention.
There are two EMA's, one and two. The first one is going to
be a 26 period EMA, and when I say "EMA" folks, that is exponential moving average.
It's important to understand the difference between the exponential
moving average and the simple, is because the exponential,
obviously, it has a higher weighting on more recent price,
so it is an important feature.
Then there is a short term EMA. The first one was the long term at 26 periods,
the short term is taken on 12 periods.
So we have a 26 period, and a 12 period EMA. Then, we have the MACD line.
The MACD line is going to be the 12 period
minus the 26 period to generate the MACD line.
After that, there is another line that we need to pay
attention to, and that is referred to as the signal line.
The signal line is nothing more than a 9 period EMA of the MACD line.
A 9 period EMA is plotted on the MACD line to generate
the signal line and the MACD line.
Once again, all of this is calculated with nothing more than
the 12 period EMA minusing the 26 period EMA, in the very beginning.
Here we can take a look at what the MACD looks
like, and we can break down all of these different parts that
we were just talking about.
We have a one over here, and that is representing our MACD
line, so that is going to be the gray line.
Hopefully that doesn't make it harder to see for you,
but once again, one is going to be our gray line, that is the MACD line.
Then we have the two, and the two is going to be talking about
our signal line, which is this orange line here. Then we have
three down here, which is going to be representing the histogram,
and the histogram is going to be nothing more than the MACD
line minus the signal line.
It just represents the difference between the MACD line and the signal line.
If we obviously have a negative or positive ratio, it
is showing us that, based on which side of what is called the zero line,
the histogram is being drawn on.
What divides the histogram is going to be referred to as the zero line.
As we look at these, let's break this down, the two important
lines, because this is where a large portion of the strategies
employed by the MACD come from. The one is being the MACD line,
so once again, this gray line here, this is the MACD line,
and essentially what this does is it helps us as traders
identify bullish and bearish market trends. Then we have the
number two, which is the signal line, which is this bright
orange line that is on top of it over here, and the signal
line is analyzed in addition to the MACD line, as well as
relative to where the MACD line is in relation to it, to help
spot reversals and mark potential entry points in the market as well.
Traders pay a lot of attention to the moments in which
these lines intersect and change hands in regards to who's
on top and who's on bottom, as well as where these lines are
in relation to the zero line over here.
The MACD crossover is probably the most popular MACD strategy
that is used by traders on a daily basis.
It's relatively simple to use. Once we have our MACD applied to our charts,
we have them split in half
like we showed you guys in the beginning, it will look something
like this depending on what your color preferences are. Here,
we have a bullish example, as well as a bearish example, of
potential entry points in the market due to the cross occurring.
The bullish example is going to occur when the blue line,
which in this case is our MACD line,
the blue line is crossing above the red line, which is
going to be our signal line.
Remember just like we talked about, there's the MACD line,
and then there's the signal line. The signal line is going to be more tame.
The MACD line is going to be the one that's crossing above and below the signal line.
When we cross above the signal line itself with the MACD
line, we have ourself a potential buying scenario.
We just follow the the charts straight up here, and this would
represent a time in the market where we may potentially want
to jump in for some type of long opportunity.
Then, we have a potential bearish entry opportunity when the
MACD line crosses below the signal line, so we're just reversing it.
When the MACD crosses below the signal line, we have
a potential selling opportunity. If we follow it up, we
might be presented with an opportunity where we see bearish
activity thereafter, because what is happening here is, the
MACD is trying to forecast potential reversals that are occurring
in the market as early as possible.
The MACD provides a read to traders, known as the zero line
crossover, and this is referring to literally the zero line
when the MACD is crossing above or below it.
Remember the center of this histogram is what is referred
to as the zero line. As the histogram deviates lower or deviates
higher, it's representing the difference between the MACD
line and the signal line. What we have here is, a situation
where we view the drop or rise above the zero line with the
MACD line, as either a bearish or bullish scenario. If the
MACD line is above and then falls below, the act of falling
below we view as a bearish event, and we consider that to
be something indicative of a potential bearish trend to come.
With the bullish rally above the zero line with the MACD,
then we have something where we may be anticipating some
type of bullish activity thereafter.
Now, the zero line crossover is not meant to be a standalone signal, so we
strongly encourage using it as a tidbit of information, not an exact entry point.
Another powerful feature that the MACD can provide is, it
can highlight divergences. Now when I say divergences,
I'm talking about a divergence from price and the MACD.
If price is rising, but the MACD is falling, we have a divergence.
The MACD is trying to let us know that the bullish trend
that is being displayed by price may be coming to an end
soon, or if it's the other way around and the price itself
is falling but the MACD is going up, the MACD may be trying to
tell us that hey, those bulls are about to enter into this market and push price
the other way. The idea here is to use this information as
something to be on alert for, but not something as a standalone entry.
When we use this as an entry the way that we generally want to do,
it is by waiting for price to agree with the divergence.
That means that if price is moving up, but the MACD is moving
down, then we would want to wait until we see price itself
begin to stop moving upwards and start moving downwards, and
then jump in at that point with the expectation of a strong
bearish ride, due to the divergence leading the way ahead of time.
That is the process of the divergence.
It is a very valuable piece of information, but we won't,
we don't want to jump every time that line goes a different direction of price.
Now for some of our most frequently asked questions, just
in case you are already developing them.
The first one is: Is the MACD bullish when it is positive?
The answer to this is yes, a positive MACD indicates a bullish
signal. The MACD is bullish when the short term EMA stands above the long term EMA,
so that is a bullish scenario,
The MACD would be negative when we have the short term EMA below the long term EMA.
Our second most asked question is: What are the numbers on
the right side of the MACD indicator chart? The numbers on
the side of the chart are nothing more than the MACD indicator settings themselves.
The default values, remember folks, are 12, 26, and 9. 12 represents
the shorter EMA, 26 represents the longer EMA, and 9 represents the signal line.
It may look different depending on which chart that you,
or which charting platform you are using, but you've seen it already on Finamark,
so you're good to go if that's the platform you end up using. Number three
is going to be: What does the MACD zero line represent? The moving
average convergence divergence zero line, in full name, is
just the center line that divides the positive area of the
negative area on the histogram chart that the line is oscillating
back and forth above and below.
Remember, if the MACD line looks like this, the line that goes
through the dead center is the zero line. Number four is: What
does a negative MACD number mean? A negative MACD number means
that the shorter 12 period EMA is below the longer 26 period
EMA. That's all, it's not anything overly difficult to understand.
When the short one goes below the big one,
we are expecting some type of bearish activity and vice versa
when it's the other way around.
In conclusion, the MACD can be a very powerful tool with
the ability to highlight entries on its own, or in conjunction
with further analysis, which is the option that we generally prefer with all things.
The MACD is relatively easy to use as well.
Once you understand what we're looking at and break it down
into the MACD line, the signal line, the histogram, and the zero line,
we're just watching them slowly oscillate back and forth,
and it's not too hard to see that if one line goes over the
other line, we've got something good coming potentially,
assuming that it's fitting the scenario. We can also pay
attention to which way the lines are going in relation to
which way price is going, and if they're not going the same
direction, then we might have ourselves a divergence, which
is another clue that the market may be presenting ourselves with.
I like the MACD a lot personally,
it's been a big part of my personal trading career, and I
also think that I'm seeing a lot of success with it with the traders that are
tying it into their Gauntlet strategies,
so make sure you check out the MACD if you've never heard
of it before, and if you have used it before, then you already
know what I'm talking about. It's been a pleasure as always folks.
Thank you for joining me yet again, and I will see you soon. Cheers folks!