One of the most popular market analysis tools in options trading is the MACD indicator. This oscillator is famous for its simple algorithm combined with its high efficiency, which is why today you can find MACD in various configuration settings in more than half of strategies. Our article will tell you why this indicator is so much in demand and describe how to make benefit using MACD.
Using MACD for is very effective at finding the start of a new market trend, which is a relevant task in the market. We are not interested in how many pips the price will pass during the move, but more interested in data about which way it will move up to a certain point.
MACD indicator description
The indicator is very simple – no wonder it is so popular.
It has just three simple components:
– The MACD line
– Signal line
This line is made very simply. It takes the long moving average (EMA) and subtracts it from the shorter EMA. The long one usually equals 26 days, and the short one 12 days. However, no one prevents you from specifying your own values.
It is the EMA from the MACD line. Here you can also select the length of the moving average. As a rule this value is 9.
As the price develops, the distance between the MACD line and the signal line will change. This is what the histogram shows. Its function is to show exactly how far or how close the two MACD lines are to each other.
In addition, the histogram can be above or below the zero (baseline) line. When the histogram is higher the price goes up. And vice versa, when it is lower, the price goes down.
The general principle of use is as follows. When the histogram is above the zero line and its value increases, it means that the price goes up. On the contrary, if the histogram is below the zero line, the price is falling.
The MACD indicator was created long before the market even existed, yet using MACD is one of the most popular auxiliary programs in trading. Catching the beginning of an incipient price movement is an important moment in a trader’s work.
MACD signals are most accurate when the market is experiencing high volatility, so use moving assets and enter into transactions during the day. Focus on the crossovers of the average lines of the indicator. We recommend to consider buying an option “higher”, when the lines, crossing under the zero mark, begin to move upwards.
A sell signal can be considered when the lines cross above the zero mark and move down. Note that this crossover should not occur near the zero line.
The simplest and most affordable MACD strategy involve studying the chart and taking the right approach. Before setting up the indicator and using MACD, you need to study the methods of working with it carefully and choose a reliable broker platform like eToro of FXPro.
We already know that if we take the standard values, the MACD value shows the difference between two moving averages, calculated using MACD indicator with the formula EMA 12 – EMA 26 = MACD.
MACD indicator setting up on IQ Option platform
MACD is relevant to:
– Locate the current trend
– Identify lows and tops
– Get signals when the MACD and the signal line cross zero
– Search for a divergence
Once the settings are correct, you can get down to work:
1) The trend is determined by analyzing the MACD line. Thus, if it gradually decreases, it indicates a bear market, if it increases, it indicates a bull market. At the same time, the indicator does not react to the appearance of bars of the opposite trend, but simply slows down, so it allows us to distinguish a slowing trend from a complete reversal.
2) Effective for looking for reversal moments or the beginnings of a correction. If the current trend dries up, the line gradually changes direction. But it is risky to buy on the basis of a reversal alone – it is advisable to make sure you understand the situation correctly, using MACD or other technical analysis tools.
When the fundamental line crosses moving averages, leaving one zone and moving to the other, it signals the price movement. For example, when the zero level is crossed from the bottom to the top, it indicates an upward move. If it crosses from top to bottom, it means that the price will go down.
3) Often the RSI indicator is taken, which is also suitable, and complements the MACD. It is an oscillator, which allows you to determine the strength of the market trend and locate possible reversal points. RSI compares the absolute values of an asset’s price growth over a specific time period with the levels of its decline over the same time period, and plots the results on a chart in a curve format with an oscillation range of 0-100%.
4) One of the best MACD signals is considered to be a signal line crossing or moving from zone to zone. If the histogram goes into the plus zone, expect an increase in value, if it goes into the minus zone, expect a decrease in value. These signals are generated before the zero crossing, but not all of them work out. Parabolic SAR is often taken to confirm the trend, which indicates a change in the trend. This increases the probability of making a correct prediction using MACD.
5) If you know how to use the MACD indicator you can detect a divergence, which signals a reversal. If the direction of value and the lines are in opposite directions then a reversal can be expected. And as soon as the next main signal appears of MACD indicator, it is safe to buy.
6) Successful market entries can be found by using Stochastic and MACD indicator. They work with different ranges and complement each other perfectly, allowing the trader to find trends and trade successfully.
5 minute trading using MACD
When working on the 5 minute chart, trading tips are provided by the MACD, as this indicator gives data regarding divergence, convergence between 3 MAs. Please note that the algorithm of using MACD for 5 minute trading is considered to be most effective when operating in a sideways range. In case the quotes are mostly increasing, or decreasing, then the tool works much worse – this is the main disadvantage of the MACD indicator.
Conditions for buying a call: When the bar chart crosses the 0 mark in the up direction, then during the reversal of polarity, you need to complete the operation to go up. Buy Put: When the bar chart crosses 0 downwards on the chart, after the end of the candle, close the trade downwards.
You can try to use MACD by registering on the IQ Option broker’s platform.
General conclusion of MACD
The MACD is a really high performance tool, because of the way it works – it is a combination of a trend analysis tool and an oscillator algorithm. In trading it works quite flexibly, but it should not be used alone, only in combination with basic trend-following indicators or additional oscillators. All in all, MACD should be in every trader’s arsenal as a quality market forecasting tool.