Introduction to MACD

MACD is a useful indicator in many situations. As always it ought not to be used on it’s own to make decisions about probabilities of price movement. It is like most indicators, a lagging indicator. That means that it looks back (all any indicator can do) at price and gives a representation of what was happening. Only you can decide what may happen next – not the MACD, any other indicator, or any combination of indicators. Indicators only paint a picture for you to see. How you interpret the picture, is the really big issue.  [See also: Rethinking indicators]

Many expert traders do not like MACDs while some love it. It is all about what you as an individual find useful. MACD gives and idea of where momentum may be heading based on a calculation of averages of the historical periods of the prices.

Importantly MACDs drawn on 4-hourly charts will look quite different to those on say a 1H or 15Min chart. That’s because it’s looking at price in different time periods. So, that means that perspectives created by the MACD are particular to the time frame you’re interested in trading. It would be silly to take a MACD indication on a 5 min chart and use that for decisions on trading a 4-hourly time frame.

When I first explored the MACD is all appeared confusing – as there is so much terminology in there. Remembering which is the MACD line and the signal line causes some difficulty. Both are part of the MACD indicator. Basically the MACD line (which is part of the whole MACD thing) is the more choppy, more responsive line.   It’s best to keep one of those in mind as an anchor. The signal line is the slower less erratic one. It is the 9 period Exponential Moving Average of the MACD line. This sounds confusing but basically the signal line is a smoothing of the more responsive MACD line itself (even though the whole indicator is ‘the MACD’ – it took me ages to grasp all that!). 

This is not a tutorial so I do not go further than to give the outline above. It is best to study the videos from Informedtrades below. I must have seen them over 50 times already. Having interacted with the charts over months and gone back to these videos, I come to understand so much more. I emphasise that understanding comes both from knowledge and interaction. It really does take time.

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