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The MACD Indicator In Depth

Reading time: 17 minutes

This article will provide an explanation of what the MACD indicator is, and it will explore the various features of the MACD indicator, how to scalp with the MACD indicator, how to perform intraday trading with the MACD indicator, MACD breakouts, MACD patterns, and much more!

MACD Indicator

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

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

What is the MACD Indicator?

MACD stands for Moving Average Convergence Divergence. It is a trend-following, trend-capturing momentum indicator, that shows the relationship between two moving averages (MAs) 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 is known as the signal line, which is 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 into the MetaTrader 4 (MT4) platform.

MACD default setting USD/CAD H4 Chart

Source: USD/CAD Hourly Chart - Data Range: 22 May, 2017 - 20 Jul, 2017

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, as they are timed identically.

MACD Indicator

Source: GBPJPY Chart - Data Range: 7 Mar, 2017 - 10 Mar, 2017

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 a lower high, but the price is making a higher high – we call it bearish divergence. 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 trendline break. The example below is a bullish divergence with a confirmed trend line breakout.

bullish divergence with a confirmed trend line breakout

Source: An Example of a Confirmed Break - EUR/USD Hourly Chart - Data Range: June 6, 2017 - 28 Jun, 2017

bearish divergence with a trend line breakout

Source: Example of a Bearish Divergence With a Trendine Breakout - EUR/USD Hourly Chart - Data Range: May 24, 2017 - Jun 15, 2017

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:

The system is traded on 30-minute time frames, and it is suitable for trading major Forex currency pairs such as: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, and other currency pairs like: GBP/JPY, AUD/JPY, USD/JPY, NZD/JPY, and GBP/NZD.

intraday trading system with MACD

Source: EUR/USD M30 Chart - Data Range: Jul 17 2017 - Jul 25, 2017

The rules are as follows:

Long Trades:

  • The price should be above the SMMA
  • The MACD should be below the 0 line
  • The William % Range should be crossing -80 from below

Short Trades:

  • The price should be below the SMMA
  • The MACD should be above the 0 line
  • The 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 what you might have read on the Internet. The reason being – the MACD is a great momentum indicator and can identify retracement in a superb way. Don't forget the basic principle of trading – in an uptrend, we buy when the price has dropped; in a 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.

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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:

  • EMA 34 (Blue)
  • EMA 55 (EMA)
  • MACD (34,89,34)
  • Stochastic Oscillator (8,1,3 and 13,1,3), overlaid
  • 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:

  • The Blue 34 EMA should be above the Red 55 EMA
  • The MACD should be above the 0 line
  • The Stochastic (at least one of them) should be recently oversold at the 20 level, and should be crossed up
  • The Target is an Admiral Hourly PP

Short entries:

  • The Blue 34 EMA should be below the Red 55 EMA
  • The MACD should be below the 0 line
  • The Stochastic (at least one of them) should be recently oversold at the 20 level, and should be crossed up
  • The Target is an Admiral Hourly PP

Stop-loss:

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

Admiral Pivot support EUR/USD M5 Chart

Source: An Example for Short Entries - EUR/USD M5 Chart - Data Range: Jul 25, 2017 - Jul 26, 2017

Admiral Pivot support short entries GBP/JPY M5 Chart

Source: An Example for Long Entries - GBP/JPY M5 Chart - Data Range: July 26, 2017 (between 10:30 - 19:50)

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

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 as an exit confirmation.

Indicators:

  • Admiral Pivot (D1) (requires MT4SE)
  • 50 exponential moving average (50 EMA)
  • 200 exponential moving average (200 EMA)
  • 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 EMA is higher than the 200 EMA. The trend is down if the 50 EMA is lower than the 200 EMA.

Long trades:

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

Short trades:

  • The trend is down (50EMA <200EMA), the MACD histogram is below the 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 (the next Pivot point resistance).
  • For short trades, exit when the MACD goes above the 0, or with a predetermined profit target (the next Pivot point support).

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

Stop-loss:

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

aggressive stop loss AUD/JPY H1 Chart

Source: AUD/JPY Hourly Chart - Data Range: Jul 21, 2017 - 26 Jul, 2017

conservative stop loss GBP/USD H1 Chart

Source: GBP/USD Hourly Chart - Data Range: Jul 21, 2017 - Jul 26, 2017

Trade Forex & CFDs With Admiral Markets

Effective Combo with Admiral Keltner Indicator

This strategy uses the following indicators applied on the chart:

  • Bollinger Bands®: Length 20, Standard Deviation 2
  • Admiral Markets Keltner (MT4SE with default settings)
  • MACD (12,26,9)
  • Admiral Pivot (has variable settings, which is explained below)

With both Bollinger Bands®, Admiral Keltner, and the 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 (ATR).

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 highlights (in the graph below) shows examples of Bollinger Bands ® (green lines) going inside the Keltner Channel (red lines). At those zones, the squeeze has started. However, 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 - Data Range: 7 Mar, 2017 - Mar 10, 2017

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 inform you when the market is transitioning from lower volatility to higher volatility. Using these two indicators together is stronger than only 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 provide traders with a later signal, but on the other hand, the MACD signal is accurate in normal market conditions, as it filters out potential fakeouts.

Trade Trigger

MACD filtering potential fakeouts

Source: EUR/USD Hourly Chart - Data Range: Jun 5, 2017 - Jul 19, 2017

Buy:

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

Sell:

  • 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 a entry short.
  • The MACD must agree with the direction taken by the price, as well as having 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 need to wait for the candle to break above or below the Bollinger Band, with the MACD confirming the entry, and then we take the trade.

the squeeze and the release AUD/USD H4 Chart

Source: AUD/USD Hourly Chart - Data Range: Apr 10, 2017 - May 24, 2017

Recommended time frames for the strategy are M30-D1 charts. The strategy can be applied to any instrument. Intraday breakout trading is mostly performed on M30 and H1 charts. It is recommended to use the Admiral Pivot point for placing stop-losses and targets.

A stop-loss for buy trades is placed 5-10 pips below the Bollinger Band middle line, or below the closest Admiral Pivot support, while a 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 a M30-H1 chart, we use daily pivots, for H4 and D1 charts, and 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 Hourly Chart - Data Range: Jul 13, 2017 - Jul 25, 2017

MACD Patterns

When we apply 5,13,1 instead of the standard 12,26,9 settings, we can achieve 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. It is argued that, the best MACD setting for a MACD pattern is 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 an uptrend. A possible entry is made after the pattern has been completed, at the open of the next bar.

MACD Bearish SHS

This is a Bearish SHS pattern (Head and Shoulders) that marks a reversal and a possible turn to an 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 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 O 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

MACD Bullish 0 Line Rejection on GBP/JPY H4 Chart

Source: Examples As Seen On The Charts - GBP/JPY Hourly Chart - Data Range: Apr 6, 2017 - May 22, 2017

MACD Bearish 0 Line Rejection on GBP/JPY H4 Chart

Source: GBP/JPY Hourly Chart - Data Range: Apr 1, 2017 - May 17, 2017

Bear in mind that the best time frame for the MACD patterns is H4. By using MACD the right way, you should hopefully empower your trading knowledge and bring your trading to the next level! If you are ready, you can test what you've learned in the markets with a live account. If you need some practice first, you can do so with a demo trading account. Demo trading accounts enable traders to trade in a risk-free trading environment, whereby traders use virtual funds, so that their capital is not at risk.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Risk Warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.