The MACD Indicator In Depth

MACD Indicator

The MACD is an indicator that allows for a huge versatility in trading. We can use the MACD for:

  1. Divergence;
  2. Intraday trading;
  3. Crossover trading;
  4. Scalping;
  5. Breakouts;
  6. Effective combo with Admiral Keltner (MT4SE);
  7. MACD patterns.

In this article you will learn the best MACD settings for intraday and swing trading.

What is the MACD Indicator?

The MACD stands for Moving Average Convergence Divergence. It is a trend-following, trend-capturing momentum indicator that shows the relationship between two moving averages of prices. The MACD was created by Gerald Appeal in the late 1970s. The MACD indicator formula is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called signal line, is then plotted on top of the MACD, usually marking triggers for buy and sell signals.

This is a default setting. The MACD is a lagging indicator, also being one of the best trend-following indicators that has withstood the test of time. You don't need to download the MACD indicator separately as it is already built in our MetaTrader 4 platform.


MACD default setting USD/CAD H4 Chart

Source: USD/CAD H4 Chart, July 20 2017, 17:05 Platform Time

Another version of the MACD is the so-called 2-line MACD, which can also be combined with great trading strategies. The difference is that the default MT4 MACD indicator lacks the fast signal line (instead of showing the fast signal line, it gives you a histogram of it). For trading, it's completely irrelevant as long as you use it with other tools that work in conjunction with the MACD itself. When the red and blue MAs cross on the 2-line MACD, it is equivalent to the red MA line crossing the green histogram on the default MT4 MACD. There is no lag time with respect to crosses between both indicators, they are timed identically.

MACD Divergence

Understanding MACD convergence divergence is very important. When the price is making a lower low, but the MACD is making a higher low – we call it bullish divergence. If the MACD is making lower high, but the price is making a higher high – we call it bearish divergence.

MACD Divergence Bullish / Bearish

Source: Nenad Kerkez T

Divergence will almost always occur right after a sharp price movement higher or lower. Divergence is just a cue that the price might reverse, and it's usually confirmed by a trend line break. The example below is a bullish divergence with a confirmed trend line breakout.

bullish divergence with a confirmed trend line breakout

Source: EUR/USD H1 Chart, June 6-28, Admiral Markets Platform

This is an example of a bearish divergence with a trend line breakout.bearish divergence with a trend line breakout

Source: EUR/USD H1 Chart, May 24-Jun 15, Admiral Markets Platform

Intraday Trading with the MACD Indicator

The MACD can be used for intraday trading with default settings (12,26,9). If we change the settings to 24,52,9, we might construct an interesting intraday trading system that works well on M30.

The intraday trading system uses the following indicators:

  1. Smoothed Moving Average (365,close)
  2. MACD (24,52,9)
  3. Williams Percent Range (28)
  4. Admiral Pivot Point Indicator (D1)

The system is traded on 30-minute time frames, and it is suitable for trading major Forex pairs (EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD), including GBP/JPY, AUD/JPY, USD/JPY, NZD/JPY, and GBP/NZD.

intraday trading system with MACD

Source: EUR/USD M30 Chart, July 25, Admiral Markets Platform

The rules are as follows:

Long Trades:

  1. The price should be above SMMA;
  2. MACD should be below 0 line;
  3. William % Range should be crossing -80 from below.

Short Trades:

  1. The price should be below SMMA;
  2. MACD should be above 0 line;
  3. William % Range should be crossing -20 from above.

As you can see from the examples above, the MACD is used in a completely different way than you would read on the Internet. The reason being – MACD is a great momentum indicator and can identify retracement in a superb way. Don't forget the basic principle of trading – in uptrend, we buy when the price has dropped; in downtrend, we sell when the price has rallied. This is exactly what the MACD is pinpointing at – when the price is ready to be sold and/or bought. Trading with the MACD should be a lot easier this way.


Scalping with the MACD Indicator

This scalping system uses the MACD on different settings. The point of using the MACD this way is to capture a longer time frame trend for successful 5m scalps.

Indicators:

  1. EMA 34 (Blue)
  2. EMA 55 (EMA)
  3. MACD (34,89,34)
  4. Stochastic (8,1,3 and 13,1,3), overlaid
  5. Admiral Pivot set on H1 (requires MT4SE)

Time frame: 5m

Pairs: EUR/USD (focus), GBP/USD, GBP/JPY, USD/JPY, AUD/USD, EUR/JPY, USD/CHF

Long entries:

  1. Blue 34 EMA should be above Red 55 EMA;
  2. MACD should be above 0 line;
  3. Stochastic, at least one of them, should be recently oversold at the 20 level and be crossed up;
  4. Target is Admiral Hourly PP.

Short entries:

  1. Blue 34 EMA should be below Red 55 EMA;
  2. MACD should be below 0 line;
  3. Stochastic, at least one of them, should be recently oversold at the 20 level and be crossed up;
  4. Target is Admiral Hourly PP.

Stop-loss

Stops go below Admiral Pivot support (for longs) or above Admiral Pivots resistance (for shorts).

Example for short entries:

Admiral Pivot support EUR/USD M5 Chart

Source: EUR/USD M5 Chart, July 26, Admiral Markets Platform

Example for long entries:

Admiral Pivot support short entries GBP/JPY M5 Chart

Source: GBP/JPY M5 Chart, July 26, Admiral Markets Platform

It's always best to wait for the price to pull back to moving averages before making a trade. Have in mind that Admiral Pivot will change each hour when set to H1. That is an obvious advantage of this indicator compared to other Pivot Points. H1 Pivot is best used for M5 scalping systems.

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MACD Breakouts

The MACD breakout is used to confirm Admiral Pivot breakouts in the trend direction. For this breakout system, the MACD is used as a filter and exit confirmation.

Indicators:

  1. Admiral Pivot (D1) (requires MT4SE)
  2. 50 exponential moving average (50 EMA)
  3. 200 exponential moving average (200 EMA)
  4. MACD indicator (12, 26, 9)

Timeframe: H1

Currency pairs: EUR/USD, GBP/USD, AUD/JPY, GBP/JPY, USD/CHF, NZD/USD, AUD/USD

Take breakout trades only in the trend direction. The trend is identified by 2 EMAs.

The trend is up if the 50 exponential moving average (50 EMA) is higher than the 200 exponential moving average (200 EMA).

The trend is down if the 50 exponential moving average (50 EMA) is lower than the 200 exponential moving average (200 EMA).



Long trades:

The trend is up (50EMA >200EMA), the MACD histogram is above 0 line, and the candle closes above the Pivot Point.

Short trades:

The trend is down (50EMA <200EMA), the MACD histogram is below 0 line, and the candle closes below the Pivot Point.


Targets and exits:

For long trades, exit when the MACD goes below the 0 or with a predetermined profit target (next Pivot point resistance).

For short trades, exit when the MACD goes above the 0 or with a predetermined profit target (next Pivot point support).


You can move the stop-loss in profit once the price makes 12 pips or more.

Stop-loss:

Stop-loss is placed above/below the entry candle (aggressive stop loss) or above/below support or resistance (conservative stop loss).

aggressive stop loss AUD/JPY H1 Chart

Source: AUD/JPY H1 Chart, July 26, Admiral Markets Platform

conservative stop loss GBP/USD H1 Chart

Source: GBP/USD H1 Chart, July 26, Admiral Markets Platform


Effective Combo with Admiral Keltner Indicator

This strategy uses three indicators applied on the chart:

  1. Bollinger Bands®: Length 20, Standard Deviation 2
  2. Admiral Markets Keltner (MT4SE with default settings)
  3. MACD (12,26,9)
  4. Admiral Pivot (variable settings as explained below)

With both Bollinger Bands®, Admiral Keltner, and MACD indicators, you should use the default settings that are used on the vast majority of trading platforms.

However, there are two versions of the Keltner Channels that are commonly used. Admiral Keltner is possibly the best version of the indicator in the open market as the bands are derived from the Average True Range. For this strategy, the Admiral Keltner indicator, available with MT4SE, is a must.

Consider only taking a Bollinger Bands® with Admiral Keltner breakout strategy trade when both the upper and lower Bollinger Bands® go inside the Keltner Channel with the MACD confirmation.

The yellow highlight shows examples of Bollinger Bands ® (green lines) going inside the Keltner Channel (red lines). At those zones, the squeeze has started. We still need to wait for the MACD confirmation.

upper and lower Bollinger Bands inside the Keltner Channel with MACD confirmation

Source: GBP/JPY M30 Chart, AM MT4 Platform, March 10, 18:30

However, in order to better validate a potential squeeze breakout entry, we need to add the MACD indicator. After plotting Bollinger Bands and MACD on our charts, both with default settings, we must wait for a contraction on the bands and MACD confirmation.

When Bollinger Bands® (both green lines) start to come out of the Keltner Channel (red lines), the squeeze has been released, and a move is about to take place. Wait for a candle that breaks above or below the bands as a buy or sell trade trigger confirmed by the MACD.

Bollinger Bands® and Keltner Channels tell you when the market is transitioning from low volatility to higher volatility. Using these two indicators together is stronger than using a single indicator, whereas both indicators should be used together. In this trading method, the MACD is used as a momentum indicator, filtering false breakouts. The MACD is a lagging indicator that lags behind the price and can give traders a later signal, but on the other hand, the MACD signal is accurate in normal market conditions as it filters potential fakeouts.

Trade Trigger

MACD filtering potential fakeouts
Source: EUR/USD H4 Chart, AM MT4 Platform, Jun 5-July 19

Buy:

  1. When a squeeze is formed, wait for the upper Bollinger Band to cross upward through the upper Keltner Channel, and wait for the price to break the upper band for entry long;
  2. The MACD must agree with the direction taken by the price as well as have a previous cross that also agrees with our direction.

Sell:

  1. When a squeeze is formed, wait for the lower Bollinger Band to cross through the downward lower Keltner Channel, and wait for the price to break the lower band for entry short;
  2. The MACD must agree with the direction taken by the price as well as have a previous cross that also agrees with our direction.

Another example is shown below. After both the squeeze and the release have taken place, we just needed to wait for the candle to break above/below the Bollinger Band with the MACD confirming the entry, and take the trade.

the squeeze and the release AUD/USD H4 Chart
Source: AUD/USD H4 Chart, AM MT4 Platform, April 10-May 24

Recommended time frames for the strategy are M30-D1 charts. The strategy can be applied to any instrument. Intraday breakout trading is mostly done on M30 and H1 charts. I advise using the Admiral Pivot point for placing stop-loss and targets.

Stop-loss for buy trades is placed 5-10 pips below the Bollinger Band middle line or below the closest Admiral Pivot support, while stop-loss for short trades is placed 5-10 pips above the Bollinger Band middle line or above the closest Admiral Pivot support.

Target levels are calculated with the Admiral Pivot indicator. For M30-H1 chart, we use daily pivots, for H4 and D1 charts, Weekly pivots. Both settings can be changed easily in the indicator itself.

Admiral Pivot indicator. For M30-H1 chart, we use daily pivots, for H4 and D1 charts, Weekly pivots

Source: GBP/AUD H1 Chart, AM MT4 Platform, July 13-July 25

MACD Patterns

When we apply 5,13,1 instead of standard 12,26,9 settings, we can have a visual representation of the MACD patterns. These patterns could be applied to various trading strategies and systems as an additional filter for taking trade entries. In our opinion, the best MACD setting for a MACD pattern is, indeed, 5,13,1.

MACD Bullish SHS

MACD Bullish SHS

This is a Bullish SHS (Inverted Head and Shoulders pattern) that marks a reversal and a possible turn to uptrend. Possible entry is made after the pattern has been completed, at the open of next bar.

MACD Bearish SHS

This is a Bearish SHS pattern (Head and Shoulders) that marks a reversal and a possible turn to uptrend. A possible entry is made after the pattern has been completed, at the open of the next bar.

MACD Bearish SHS

MACD Bullish Continuation

A Bullish continuation pattern marks an upside trend continuation. First, the MACD makes a downside turn from point A, marking a retracement. Subsequently, when point A is broken by the MACD histogram, it is a signal for a long entry.

MACD Bullish Continuation

MACD Bearish Continuation

A Bearish continuation pattern marks an upside trend continuation. First, the MACD makes an upside turn from point A marking a retracement. Subsequently, when point A is broken by the MACD histogram, it is a signal for a short entry.

MACD Bearish Continuation



MACD Bullish 0 Line Rejection

When the MACD comes down towards the Zero line and turns back up just above the Zero line, it is normally a trend continuation move. Points A and B mark the uptrend continuation.

MACD Bullish 0 Line Rejection

MACD Bearish 0 Line Rejection

When the MACD comes up towards the Zero line and turns back down just below the Zero line, it is normally a trend continuation move. Points A and B mark the downtrend continuation.

MACD Bearish 0 Line Rejection

Here are some examples as seen on the charts:

MACD Bullish 0 Line Rejection on GBP/JPY H4 Chart

Source: GBP/JPY H4 Chart, AM MT4 Platform, April 6-May 22


MACD Bearish 0 Line Rejection on GBP/JPY H4 Chart

Source: GBP/JPY H4 Chart, AM MT4 Platform, April 1-May 17


Please mind that the best time frame for the MACD patterns is H4.

By using MACD the right way, you should empower your trading knowledge and bring your trading to the next level!