Have you heard about the MACD indicator before?
The MACD indicator, which stands for Moving Average Convergence Divergence, is an indicator that is commonly used to determine the strength of a current trend and the probability of a trend reversal. By looking at the MACD, traders will be able to see if the current market, regardless if it’s bullish or bearish, is strengthening or weakening.
The indicator comes with three parts: a MACD line, a signal line, and a bar chart.
The MACD line
The MACD line is automatically calculated from the difference of two EMAs, namely the 12-period EMA and the 26-period EMA. If the value is positive, it means the 12-EMA is above the 26-EMA. If the value is negative, it means that the 12-EMA is below the 26-EMA. If the MACD line crosses the zero line, that means that there is no difference between the two EMAs currently.
A large difference between the 12-period EMA and the 26-period EMA will result in a MACD line that is farther from the zero line.
The signal line
The signal line is, by default, calculated from the average value of the last nine periods. You can also change this in the settings, but for the sake of this example, we’ll keep it this way.
Unlike the fast MACD, the signal line acts as a slow-moving average. This means that the averages here are calculated more slowly than the fast-moving MACD, which crosses over it.
MACD bar chart
The bar chart follows the price movement in the market. It also displays the distance between the MACD line and the signal line. Depending on the direction of the price movement, it can change its polarity relative to the zero line.
This chart will only reflect the movement as displayed in the main chart. If the prices above go upward, the bar chart will go above the zero line. If the prices go downward, then the bar chart will go below it.
How to use MACD indicator to trade on Binomo
The MACD is a common indicator used by traders to trade more profitably on your Binomo demo account. The default values are 12 for the fast period, 26 for the slow period, and 9 for the signal period, but you’re also free to change these values to your own preferences.
So, how do you use the MACD indicator for profitable trading?
There are three main ways: crossovers, divergence, and rapid rise or fall.
Crossovers can suggest when’s the best time to buy or sell an asset. When the signal line is above the MACD, this usually means that the market is going bearish, so it’s probably a good time to sell. When the signal line is below the MACD, however, it could mean that the trend is moving upward, which means it’s likely a good time to buy.
If you’re still a beginner trader, you may want to wait a bit until the trend becomes stronger before actually buying in or pulling out. You can also simply use crossovers to confirm a prevailing trend. For instance, if there’s an uptrend and you see that the MACD crosses the signal line, that simply means the market is going to continue moving up.
Divergences are a bit more tricky. This term refers to situations wherein the MACD forms highs or lows that are different from the highs and lows on the price in the above chart. This technique isn’t very reliable, so I won’t recommend it at all to beginner traders.
The last one, rapid rise or fall, is perhaps the easiest way to use this indicator. If the MACD suddenly rises or falls in a major way, it typically means that the asset is either overbought or oversold. To help strengthen your speculation, you can use this technique along with the RSI indicator too, which is also used to determine overbought and oversold levels.
You can try out the MACD indicator yourself by signing up for a free demo account on Binomo. Sign up now and begin your trading career with just a few steps!
Good luck on your trading journey with Binomo!