Crossovers occur when the MACD line crosses over the signal line, which usually signals that the trend is changing and gaining enough momentum to continue its upward trend. This is typically an entry signal for traders who want to open a long position in the market. You can also use a crossover for opening a short position. This setup will occur when the signal line moves above the MACD line.
Some strategies use the zero line, also known as the baseline, to confirm the validity of the crossover. Traders may only think a buy signal is useful when the MACD line crosses over when it is below or at the zero line. Likewise, they may only consider opening a short position if the signal line crosses over when it is above the zero line.
Below is an example of a MACD crossover.
As you can see, when the MACD falls below the signal line (left and right ovals), it is considered a bearish signal, indicating it may be time to sell. When the MACD rises above the signal line (centre oval), this indicates a bullish signal, suggesting that the currency pair’s price will likely reach a low and will see some upward momentum.
The histogram measures the difference between the signal and MACD lines. When the histogram crosses the zero line, it means the two lines are directly on top of one another.
Some traders may see the histogram trend as it approaches the zero line and receive an early warning about the coming crossover. Some may even use the upward or downward histogram trend as a signal to get into the market before the crossover occurs.
When the MACD has a high or low that does not correspond to the high or low of the price, it is called a divergence. In most instances, you will see the two move in the same direction. A bearish divergence has formed in cases where the MACD forms a series of two falling highs corresponding with two rising price high. Bullish divergence occurs when the MACD forms two rising lows corresponding to two falling lows in the price.
Sometimes, the MACD moves ahead of the market. For instance, the market continues to move upward but loses momentum as it does so. The MACD may sense this and begin moving in a downward direction. The important factor here is the direction of the MACD line, not the crossover.
Both price charts and MACD graphs move in waves. Because of this trait, it can be difficult to see divergence. However, you can add trend lines connecting the highest or lowest lows of each wave in the price and indicator charts.
You can look at these lines rather than trying to guess the direction by glancing at the chart.
MetaTrader 4 allows you to draw trend lines manually directly on your charts using a cursor tool.
How to read MACD with other indicators
Experienced traders rarely use one indicator. For example, if you trade forex, you may use MACD and Relative Strength Index (RSI) indicators combined with candlestick patterns and Bollinger Bands. This allows you to confirm whether the market is moving in the expected direction, helping you make more strategic trading decisions.
For example, if you notice a MACD crossover, you may look to a candlestick chart to see if you can find any reversal signals. You can also look at the RSI.
Markets to trade with the MACD indicator
The MACD works in any market where you can use technical analysis, including:
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Frequently asked question
The MACD is an excellent indicator for day trading, as you can adjust time periods to increase sensitivity for trading in short timeframes.
The MACD is regarded as an accurate indicator because it uses multiple variables and offers three different trading signals. However, it’s best to combine MACD with other indicators and chart patterns to confirm MACD the market’s movements.
The RSI, Bollinger Bands, and Stochastic Oscillators work well alongside the MACD.
A golden cross is when a short-term moving average crosses over a longer-term average. In the MACD chart, this is when the MACD line crosses over the signal line and is considered a sign of a bullish market.