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The Complete Guide to MACD Indicator

Last Updated: September 28, 2021

By Rayner Teo

This won’t be the usual MACD indicator stuff you see online.

I won’t tell you to…

  • Look for a MACD Divergence
  • Wait for a MACD Crossover
  • Wait for the MACD Line to cross above 0

Here’s why…

The MACD is just like any other indicators — it’s NOT meant to be traded in isolation.

If you want to use the MACD indicator successfully, it must complement the price action of the markets.

You’re probably thinking:

“Err… so how do I do it?”

Well, you’re in the right place because you’ll discover…

  • What is the MACD indicator and how does it work?
  • Common Mistakes: How not to use the MACD indicator
  • How to use MACD histogram and identify momentum reversal
  • MACD Indicator: How to use it and increase your winning rate
  • MACD Histogram Squeeze: How to identify explosive breakout trades about to occur

Or if you prefer, you can watch this training below…

MACD Indicator: What is it and how does it work

The Moving Average Convergence Divergence (MACD) indicator is a momentum and Trend Following indicator developed by Gerald Appel.

Here’s the MACD formula:

MACD Line: (12-day EMA – 26-day EMA)

Signal Line: 9-day EMA of MACD Line

MACD Histogram: MACD Line – Signal Line

Now…

You’re probably thinking:

“It’s too complex and I don’t understand what it means.”

And your brain shuts down.

But wait.

Hang on.

Don’t run away.

Because I’m about to break down the MACD formula step by step — that even a 10-year-old can understand.

Sounds good?

Then read on…

Demystifying the MACD indicator step by step

Now some of you might wonder:

“What’s the best MACD settings?”

Well, there isn’t the best setting because it doesn’t exist.

And for this post, I’ll use the default settings on MACD.

With that said, let’s break down the MACD indicator (step by step).

It’ll be easy, I promise.

#1: MACD Line

All you need to do is take the value of the 12-day EMA and minus against the 26-day EMA (you can find it on your charts with zero calculations).

And poof!

That’s your MACD Line.

Here’s an example:

I told you it was easy, right?

#2: The Signal Line

This gets even easier.

Just take the historical value of the MACD Line and divide by 9.

And that’s it — you’ve got your Signal Line.

Here’s an example:

Let’s say you have a MACD Line of these values…

1, 2, 3, 4, 5, 6, 7, 8, 9

Add the numbers up (which is 45) and then divide by 9.

So, you’ll get 45/9 = 5

Next…

#3: MACD Histogram

This is so easy (it’s laughable).

Just take the value of the MACD Line and minus against the Signal Line.

Tada!

That’s your MACD Histogram.

Here’s what I mean…

Now you might be wondering:

“So, which is the best MACD indicator settings?”

Here’s the deal:

There’s no such thing as a best MACD settings because the market is always changing.

What works best right now is unlikely to work the same in future.

So, the important thing isn’t to optimize for the best MACD indicator settings — it doesn’t exist.

Instead, you should understand the concept behind MACD so you can use it to meet your trading needs.

Does it make sense?

Then let’s move on…

Common Mistakes: How NOT to use the MACD indicator

Now…

Let me share with you 2 common mistakes traders make when using the MACD indicator.

They are:

  • Trading the MACD crossover
  • Misinterpreting the MACD histogram

Let me explain…

Trading the MACD crossover

This technique might work in strong trending markets.

But remember, most of the time the markets are in a range.

This means the MACD crossover will give many false signals that lead to “death by a thousand cuts”.

An example:

Now, there are better ways to use the MACD crossover (but more on that later).

Next…

Misinterpreting the MACD histogram

Look at the MACD histogram below:

You’re probably thinking:

“There’s strong momentum in the move. It’s time to buy!”

Wrong!

Because when such a move occurs, it’s usually too late to enter, and the market is likely to reverse.

Instead, a better approach is to go against the momentum — and trade the reversal.

Here’s how…

How to use the MACD histogram and identify momentum reversal

When I first started trading, I like to “chase” breakouts.

The more bullish the candles, the likelier I’ll buy the breakout.

However…

I was bleeding my account.

That’s when I realized I entered my trades “too late”.

I bought when the price is about to reverse in the opposite direction.

And this led to an AHA moment.

I wondered…

“What if I stopped chasing breakouts?”

“What if I took the opposite side of the trade?”

“What if I look to short when there’s strong bullish momentum?”

It worked much better!

However…

I had trouble explaining to traders what strong momentum is.

So…

That’s where the MACD histogram comes into play.

Here’s how it works…

      1. Wait for the price to come into Market Structure (like SR, Trendline, etc.)
      2. MACD Histogram shows strong momentum (you want to see a high peak/trough)
      3. Wait for price rejection before trading in the opposite direction

Here’s an example:

MACD Indicator: How to use it and increase your winning rate

The concept is simple.

We’ll use the MACD indicator to define the higher timeframe trend, and then trade in the direction of it.

Here’s how it works:

  • Define your higher timeframe (HTF)
  • If the HTF MACD Line crosses above Signal Line, then look for long setups (on your entry timeframe)
  • If the HTF MACD Line crosses below Signal Line, then look for short setups (on your entry timeframe)

I’ll explain…

Define your higher timeframe

Let’s say your entry timeframe is 4-hour, then your higher timeframe is the Daily.

Or, if your entry timeframe is the Daily timeframe, then your higher timeframe is the Weekly.

Your higher timeframe can be anywhere between a factor of 4–6 of your entry timeframe.

If the higher timeframe MACD Line crosses above Signal Line, then look for long setups (on your entry timeframe)

An example:

If the higher timeframe MACD Line crosses below Signal Line, then look for short setups (on your entry timeframe)

An example:

MACD Histogram Squeeze: How to identify explosive breakout trades about to occur

Here’s a fact:

Explosive breakouts usually occur when there’s low volatility in the market — you’ll notice the range of the candles gets small and “tight”.

But if you’re a new trader, this might not be easy to spot.

So, that’s when the MACD Histogram can help you.

Here’s how…

      1. The price comes into key Market Structure (like SR, Trendline, etc.)
      2. The MACD Histogram looks almost “flat” without any visible peak/trough
      3. Enter the breakout when the price breaks the Market Structure

Here are a few examples:

This is powerful stuff, right?

Now you might be wondering:

“For how long should the MACD histogram be flat?”

There are no fixed rules here.

But generally, I’d like to see it flat for a minimum of 5 candles (or more).

Because the longer it remains flat, the likelihood of a stronger breakout.

Conclusion

So here’s what you’ve learned today:

  • The MACD is a Trend Following and momentum indicator
  • Don’t “blindly” trade the MACD crossover, it’s a losing strategy. Instead, use it as a trend filter so you can increase your winning rate
  • You can use the MACD histogram to “predict” market reversals — look for a strong move into Market Structure followed by a price rejection
  • When the MACD histogram is flat, it signals the market is ready for a breakout

Now here’s a question for you…

How do you use the MACD indicator?

Leave a comment and share your thoughts with me.

    • Hey there Sia, we find that divergences does not have a definite edge in the markets, which is why we focused more on the practical and mathematical use of the indicator!

  • I am confused about the entry timeframe. If I am doing day trading or swing trading, which timeframe chart should I be using?
    MACD tend to confuse me.

    • Hey there Sandra, the key here is to choose a timeframe you think you can be consistent with as there’s really no “best” timeframe but the best for you!

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