Hello guys, today we're going to talk about one of the most popular indicators the moving
average convergence divergence or MACD.
The MACD is a momentum oscillator that also provides trading signals, but however doesn't
provide any overbought or oversold areas, because it doesn't have any upper or lower
limits.
In today's video I am going to show you how MACDs calculated and how to use it in your
trading.
The MACD line is plotted by subtracting a low period moving average from a high period
moving average.
Then a moving average of that MACD line is plotted in order to provide trading signals.
Lastly there is a histogram plotted that shows the difference between the MACD line and the
singal line.
Let's go back to cTrader where I am going to show you exactly what I mean.
Here we see that we have plotted a EURUSD chart 1H chart, if we go to function (indicator)
button here, and go to oscillators, we're going to find the MACD.
It's called MACD crossover.
So let's select this, the MACD indicator window is going to pop up where we see the following
parameters.
We can change the source of the indicator, usually it's always close.
The long cycle is the periods, of the long moving average.
The short cycle is the periods of the short moving average, and the signal periods is
the periods of the indicator of the MACD line.
Let's plot the indicator and I am going to show you exactly what we're seeing here and
you're going to understand better.
We have plotted the MACD with the default parameters, and we see it plots a histogram
and two lines.
As I've explained before the blue line is the MACD line.
We said that the MACD line is calculated by subtracting two indicators, we've plotted
an MACD 26 / 12, so if we plot two exponential moving averages, the MACD uses exponential
moving average, let's plot a 26 one and let's plot of of 12 parameters.
Let's give them a different colour.
If we subtract this yellow moving average (the small one) from the big one we're going
to get the exact value of the MACD.
So when the distance of the moving average is getting bigger, the MACD is going lower.
On a Down trend.
The opposite on an up trend.
This red line here is the signal line.
The signal line is just a moving average of the blue MACD line.
So if we change this signal periods to 5, it's going to go closer to the blue line because
it's an average of that blue line.
If we change it back to 9, the default parameter, it's going to go further apart again.
We use this line to - MACD uses this line to give buy or sell signals.
The histogram here represents the distance between the signal line and the MACD line.
When the MACD is above the signal line, it's positive, in the other case it's negative,
and when they're crossing exactly on the cross, it's 0.
The histogram is 0 as you see here.
Now that you understand how the indicator is plotted we're going to talk about how to
use the indicator in your trading.
The first and most famous way of using the MACD is trading the cross over.
The cross over is when signal line crosses the MACD line or when the MACD line crosses
the signal line.
In order to trade the cross over successfully you need to be trading them in some context.
You cannot just take all the cross overs because, you're going to fail a lot it's not that simple.
Let's go to cTrader where I am going to show you what I mean.
We see here we have the blue MACD line, that I have talked about before, and the cross
over is when this line crosses the signal line, the signal line is the red dotted line,
the moving average, so we have a positive cross over, when the signal line crosses from
below to above and a negative crossover when the MACD line crosses from above to below.
This crossover for example, is a long signal, because the MACD crosses from below to above,
and this is a short signal because the MACD crosses from above to below.
As I said before these signals need to be traded in context, you cannot just be taking
all these signals that you see here, you're going to just lose money.
The MACD is supposed to provide you a signal after you've done your technical analysis,
if you know you have established, you have a trend already (it's better traded in trends),
then you can get the signals.
For example here we see that the price is doing lower lows all the time, so we have
established that there is some sort of trend, so we can be taking those short signals, only
not the long signals.
This is another example, we have established, here we have higher highs and higher lows,
so we can be getting, we can get this signal for example, this is a good signal we are
inside some sort of trend, so we're good to go.
The next type of signals that we get with MACD is when the MACD line, the main line
of the indicator, crosses the 0 level.
This is particularly useful for trading trends, and it's also very useful for understanding
when the trend is finished.
It's the same thing as two moving averages crossing over, so let's go to cTrader I am
going to show you what I mean.
Here we see the MACD line the blue line crossing the 0 level.
In order for you to look at this cross better, you can plot another indicator which is essentially,
kind of the same thing, the MACD histogram, let's plot one.
The MACD histogram plots the MACD line as a histogram, as you can see here the blue
line, and this histogram here are the same thing.
So when the blue line or when the histogram crosses the 0 level, we have the same type
of signal, let me show you the 0 level so it's easier for you to see, it's around here
and around here.
This signal is particularly useful as I said for determining the end of a trend.
So in this case where we have a trend that have started, and we're trading with the trend,
in this spot exactly where the MACD crosses the 0 line, it's very successfully showing
us that the trend has finished, so as you can see we get all the trend.
Same thing with this trend, it crosses exactly here and we get all the trend so it's very
useful for understanding when the trend is finished.
In order to see it as a trading signal, maybe you can see it for the opposite signal after
a trend, to go long after a down-trend, or it's not recommended to just enter with this
signal, to expect that a trend is going to come because you don't know that a trend is
going to come or not, unless you have some news that you are expecting or something like
that.
That brings us to the third way of using MACD you can actually plot two different MACD indicators
with different parameters, one of them is supposed to be giving you the overall direction
of a trend, and the other one is supposed to be giving you the trading signals, this
way you know that you're always trading with the trend and you filter out a lot of failed
signals.
Let's go to cTrader I am going to show you what I mean.
So let's remove this histogram, and let's plot, let's actually plot another histogram,
which has a lot bigger parameters, so we're going to find the difference between the two
hundred period moving average, and the one hundred period moving average.
We're going to put the signal periods to one because all we want to do with this big indicator
is to get the direction.
So you see here when this MACD that I have plotted is above 0, then my trend is positive.
When this indicator is below 0, then my trend is short or negative or short.
This indicator is going to be showing you even the slightest slope, it doesn't mean
that you need to have a very steep trend, but it's going to give you just the slightest
slope so that you can be trading with the overal direction of a trend so, let's see
this part for example.
The indicator is showing us that the price has a negative slope, something we can see
from the trend line here, and what we do is see the slope from the second indicator, and
get the signals from the fast MACD with the default parameters, but we're only getting
the signals that go with the direction of the big trend.
So we're going to be getting this signal short signal, short signal again, all these signals
are going to be, most of these signals are going to be successful because we're going
with the direction of the trend.
Same thing here, long trend with MACD, we're only getting the long signals.
Now I am going to talk about the last way to use MACD in your trading, and very popular
way.
The MACD is a great indicator to show you divergence, in my opinion it's the best indicator
you can use for divergence.
Divergence occurs when the price has a specific slope but the indicator shows you a different
slope.
Let's go to cTrader, I am going to show you what I mean.
Again we're going to be using, let's use a histogram again, it's easier for me to show
you with a histogram, so let's put the default parameters again.
Divergence occurs as I said when the price has a specific slope, but the indicator has
a different slope.
So this is a very good example of divergence.
See here, that the price is going down we have a trend line going down, and the indicator
is also going down, but at some point the price continues further down, however the
indicator has the opposite slope.
It goes up, instead of down, This is called a divergence, it's the difference between
the actual price and the indicator.
This is momentum actually, the indicator is showing us that the price even tho it's going
down, it's going down with a different momentum, it's losing momentum.
This way you can predict the end of a trend, before the actual trend is finished, before
the crossover.
Wha we can do with momentum is, most probably we're going to be closing our short signals,
it's not wise to trade against the trend, if we want to trade long, after this short
trend we can wait for the trend to finish and find a cross, like here when it crosses
above 0 then we can enter long.
The divergence is used for exiting in a very good place.
In today's video, I talked about one of the most popular indicators the MACD or moving
average convergence divergence.
I showed you al the, most of the good ways to trade the MACD, I showed you how to trade
the crossover, how to trade the MACD crossing the 0 line, how to use two different MACDs
to get overall trend direction and signals, and I also showed you how to trade, the divergence
with MACD.
In the next video we're going to talk about the Elliot Wave theory, if you liked this
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watching.