MACD Indicator Explained: 4 Advanced Strategies

in this video we have collected information from various sources to provide a complete guide to the macd indicator we created this video course for the

Trader at entry level so if you are a beginner or an advanced Trader watch the full video to grasp every Concept in detail here are the topics covered in this

course we will cover the basics of the macd indicator including what it is and how it works we will accomplish this by understanding

the components of the macd such as the macd line signal line and histogram next we will dive deep into the uses of the macd indicator including the

histogram slope crossovers zero line crossovers zero line pullbacks and divergences you will learn how to use these techniques to identify trade opportunities

finally we will combine the uses of macd with other Concepts to create four Advanced strategies you can use to trade different market conditions

you will learn how to use the macd to trade reversals and trends so without any further Ado let's get started what is the macd indicator

macd stands for moving average convergence Divergence it is used to identify Trends and momentum of the price the macd indicator consists of three

components the macd line the signal line and the histogram let's understand each of these components in detail

first let's start with the macd line the macd line is calculated by subtracting the 26 period EMA from the

12 period EMA this means that whenever the 12 EMA is above the 26 EMA the macd line will be

above zero when the 12 EMA moves below the 26 EMA the macd line goes below zero

next we have the signal line the signal line is a nine period exponential moving average of the macd line the signal line aims to provide

crossovers as an entry trigger lastly we have the histogram the histogram calculates the distance between the macd line and the signal line

by doing so it gives us a better understanding of the momentum when the macd line is above the signal line the histogram will show Green bars

above the zero line this shows us that the price is in an uptrend [Music] on the other hand when the macd line is

below the signal line the histogram will show red bars below the zero line so these are the three components of the macd

we have the macd line the signal line and the histogram now let's understand how to use these components in different market conditions

use one histogram slope the slope or shape of the histogram gives us a deeper understanding of the trend when the price is in a strong Trend the

distance between the macd line and the signal line increases as a result the histogram expands an expanding histogram is a sign of

growing momentum therefore if the histogram is expanding we should look for entries in the direction of the trend as the trend gets weak the histogram

starts to shrink this is a sign that the momentum of the move is lost and the price might reverse or stay sideways during such times it is better to exit

our trades and wait for the price to generate momentum again for a better visual presentation the macd histogram on trading view has light

and dark colors we see dark colors when the histogram is expanding and light colors when the histogram is shrinking

at the beginning of an up move when you see two or more dark green bars with an expanding histogram it is a sign that the upwards momentum is solid and growing

therefore it is an excellent opportunity to look for buying entries then when the histogram starts to fall or decrease in size it is time to get out of the trade

this indicates that the momentum has decreased and a reversal or a sideways Trend May establish itself as you can see the shrinking of the histogram coincides with this sideways

range then we have this down move at the beginning of the down move we see these dark red bars with an expanding histogram

if you haven't already this is your last chance to exit your previous buy positions these dark red bars sign that new sellers have entered the markets and

they are moving the markets with heavy momentum it's time to enter new cell trades then once the price moves a certain

distance the histogram starts to shrink as we see these light red bars it is an early indication that the down move is losing momentum and a reversal

or sideways range May establish itself and as you can see the price stayed sideways as the histogram shrank itself again a point to remember here is that

this is just one use of the macd you cannot make trade decisions based on this one factor alone we will show you how to combine it with other factors in the advanced strategies

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below now moving on to the second use two crossovers a lot of Traders like to use the moving

average crossover system for their trading but crossovers happen only after a good move in price as a result our entries are late and the

price has already moved a lot to address this problem we could use the macd crossover the macd crossover can give you an early

sign of a reversal it can also provide you with better entries and smaller stop losses to prove this I have plotted the 12 and

26 EMAs on the chart along with the macd as you already know the macd is calculated on the 12 and 26 EMA so this

should be a fair comparison here is the reversal point from this point the price reversed from an uptrend to a downtrend

the crossover for the moving averages occurred here so your entry would be on this candle as you can see the price had already moved quite some distance before giving

the crossover signal so ideally your stop loss would be above this High which is quite a wide stop loss but if you look at the macd your entry

signal would be on this candle as the macd line crossed below the signal line it gives you a far superior entry price with a tight stop loss as a result you

capture a bigger portion of the price move here is another example we can see that the 12 EMA crossed above the 26 EMA on

this candle it is a bullish crossover so a buy entry occurs here but the crossover happens only after the price has moved a certain distance on

the other hand the macd crossover occurred here giving us a far better entry price as a result we captured a good portion

of this move with a tighter stop loss macd crossovers can be an early sign of reversal but they generate far more false signals so we can't use these

crossovers in isolation a more confirmed signal is the zero line crossover foreign use three zero line crossover

the macd consists of a zero line which is known as the midpoint of the indicator when the 12 EMA crosses below the 26 EMA the macd line moves below the

zero line this shows that the trend and momentum have shifted downwards and a downtrend may start similarly when the 12 EMA crosses above

the 26 EMA the macd line moves above the zero line this shows that the trend and momentum have shifted upwards and the price may start an uptrend now

the zero line crossovers give fewer false signals but again we need to add more confirmations for them to be high probability trades

use 4 zero line pullbacks in strong trending markets the macd line will often pull back to the zero line and the price will bounce back

so in an uptrend if the macd line pulls back to the zero line it is a good place to make buy trades but again we cannot randomly buy whenever the macd line

reaches zero we must wait for the macd line to cross above the signal line to make a Buy trade similarly in a downtrend if the macd

line pulls back to the zero line it is a good place to make cell entries we wait for the macd line to cross below the signal line we enter on the

crossover now moving on to the last use 5 Divergence Divergence is a sign of reversal and it

can be very helpful in spotting Trend changes a Divergence occurs when the price and the macd give different outputs we will use the histogram to spot these

divergences divergences are of two types A bullish Divergence and a bearish Divergence a bullish Divergence occurs when the

price makes a lower low but the macd makes a higher low this shows that the momentum on the last down move was lesser than the prior down move

it is a sign that the sellers are tired and the price will likely stall or reverse here is an example here the price was in a downtrend the

price created these three lower lows each low being lower than the previous one however the macd makes higher lows this

is a clear Divergence it shows that the sellers are losing their strength and a reversal may occur so this becomes a good Buy Signal [Music]

now let's understand the bearish Divergence a bearish Divergence occurs when the price makes a higher high but the macd makes a lower high

this shows that the momentum on the last up move was lesser than the prior up move it is a sign that the buyers are tired and the price will likely stall or reverse

here's an example here the price was initially in an uptrend the price makes a higher high but on the macd we see lower highs this is a clear

bearish Divergence it is a sign that the buyers are losing momentum and strength as a consequence the sellers might jump in and take these prices downwards

a lot of Traders find it difficult to find entries on divergences but don't worry we will show you our special technique in the strategies section

a quick note about Divergence only look at divergences if they are clear and obvious it should be apparent to the naked eye here is an example

here the price made this higher high but on the macd we have a lower Highs but the Divergence is not very clear on the macd these two tops seem equal to the naked

eye we need a close examination to see if the second top is lower than the first so the best thing to do here is to avoid such divergences

on the other hand this was a clear Divergence the price makes higher Highs but the macd makes lower highs we should look for these types of divergences

divergences that are obvious to the eye can be very powerful so these were the five uses of the macd indicator now let's discuss the strategies that

can be created around the macd indicator the first two strategies are reversal setups while the last two are Trend following setups

these four strategies will enable you to trade the markets in any condition you can use these reversal setups when the price is in a range-bound market

and during strong Trends the trend following strategies will help you catch pullbacks strategy one Divergence plus support and resistance

as we already discussed Divergence is a strong sign of reversal but we cannot trade every Divergence we need to identify potential reversal

areas and wait for the macd to create Divergence around those areas for this we will use the concepts of support and resistance

we will first identify the support and resistance levels on a higher time frame then wait for Divergence on a lower time frame here is an example

we have the GBP USD pair on the four hour chart the price made an up move and then reversed so we plot a level of resistance here

when the price arrives near the resistance for the second time we expect the price to reverse downwards again so we switch to a one hour chart to look

for Divergence here is the same price action on a one hour chart we see that the price made a higher high coming into the resistance level

but on the macd we see lower highs this is a clear and obvious bearish Divergence it tells us that the buyers have lost

momentum coming into the resistance we have a Confluence of a resistance level with Divergence this is a high probability trade

therefore we should look out for a sell trade for our entry we need to identify the lowest point between the tops on the macd

these are the two tops here is the lowest point between them we draw a line at that bar then we wait for the histogram to break

below that line on this bar the histogram breaks below the line so we enter a sell trade on the corresponding candle

as you can see we saw a steep down move after our entry here is an example of a buy setup

we have the USD JPY on a four hour chart this upside reversal helped us identify this support level when the price returns to this level we

expect the price to find support and move upwards so we switch to a one hour time frame and look for a bullish Divergence the price makes a lower low coming into

the support Zone but on the macd we see a higher low this is a clear and obvious Divergence it shows us that the sellers have lost

their strength and momentum in this down move so we identify this as a high probability trade setup now we Mark the highest point between

the bottoms on the macd and draw a line on this bar the histogram breaks above the line and it is a Buy Signal so we buy here

as you can see the price made an up move and touched the most recent highs so this is how to use the Divergence with concepts of support and resistance

now let's look at the second strategy strategy two Divergence plus Bollinger Bands Bollinger Bands are a very popular

indicator that Traders use to trade reversals the theory is this ninety percent of the time the price is

expected to stay Within These bands so whenever the price moves outside the bands we can expect the price to reverse and return inside

if the price moves above the upper band we expect it to reverse downwards similarly if the price moves below the lower band we expect the price to

reverse upwards we will combine this analogy with the macd Divergence but first we will go over the Bollinger band settings and change the length to

200. we will keep the standard deviation

200. we will keep the standard deviation to two this gives Bollinger Bands on the 200 moving average

here is a cell setup using this strategy here we see that the price was in an uptrend the trend was so strong that the price stayed above the upper Bollinger band

for an extended period now we expect the price to move lower so we look for a bearish Divergence

here the price made a higher high but the macd histogram made a lower high in fact on the second top we don't even see a green bar

this is a great sign that the sellers have grabbed hold of the markets and the price will follow soon so a selling opportunity presents itself

for this strategy our entry occurs on the first candle that closes back inside the Bands so this will be our entry candle

and as you can see the price made a solid down move after our entry moving on to buy trade initially we saw a massive down move

that stayed below the lower band the price spends a lot of time below the band we know that the price cannot spend so much time outside the bands so we are

already expecting a reversal to the upside towards the end of the move we see the price was constantly making lower lows but the macd histogram was plotting

higher lows this was a clear and obvious Divergence we have a combination of the Bollinger Bands and the macd Divergence it indicates that the sellers have lost

all momentum coming into the down move the buyers are pushing hard and an upwards reversal may occur soon so we should look for a Buy trade

our buy entry occurs as the price closes above the lower band on this candle as you can see the price shot up after our entry

so this was a unique way of trading macd Divergence with Bollinger Bands now moving on to the trend trading strategies

strategy 3 EMA bands plus zero line pullbacks for this strategy we will need four indicators we need the macd and the

three exponential moving averages all three of them are 200 EMAs but with different sources the upper EMA is calculated on the highs

of the candles the middle EMA is calculated on the close and the lower EMA is calculated on the lows

for trading view users you can use the moving average ribbon indicator just go to the indicators section and search moving average ribbon select this

indicator and change the settings to the following once done your chart should look something like this now we have these moving average bands

that will help us identify trade opportunities when the price is trending these bands will provide support and resistance to the price in an uptrend we often see that the

price pulls back to these moving averages and finds support similarly in a downtrend the price pulls back to these moving averages and finds resistance

a point worth remembering here is that price will not always bounce exactly from the Bands sometimes the price goes deeper before reversing

now let's combine this with the macd and create a strategy here is a buy setup the price made a strong up move here

the price stayed above the bands and the bands were sloped upwards this is a sign that the price is in an uptrend then the price pulls back to the EMA

bans now we expect the price to find support here and move upwards we also see that the macd line has

crossed below the zero line in an uptrend we expect the price to bounce after the macd touches the zero line this is also a sign that the pullback

might be over and that the price May resume the uptrend again so now we have a confirmation of the macd and the EMA bands

for our entry we will not use the macd line crossover macd crossovers are good for reversals but they are not so good for pullbacks

most of the time they will provide a late entry in pullbacks for a better entry we will create a short-term trend line on the pullback

and enter on its Breakout as you can see the price made a strong up move after our entry here is a sell trade

we see that the price was consistently trading below the EMA bans and the bans were sloped downwards this is a sign that the price was in a strong downtrend

price pulls back to the Bands we expect the price to find resistance at these bands and move lower we also see that the macd has crossed

above its zero line this also indicates that the price may start a down move again therefore we have a Confluence of the

macd and the EMA bands now we create a short-term trend line and wait for the price to break it on this candle the price broke below the

trend line we enter a sell trade as you can see the price moved downwards after our entry foreign strategy

strategy 4. swap zones plus zero line

strategy 4. swap zones plus zero line pullbacks if you trade support and resistance you might know that the support and

resistance have dual properties this means a resistance level can become a support level after a Breakout similarly a support level can act as

resistance after its breakdown this is why we call them swap zones they swap roles with each other we will use this concept with the macd

to trade this strategy here we see that the price was in a steady uptrend we spot this reversal here and plot a resistance level then the price broke above the

resistance level therefore the resistance level has now turned into a support level when the price pulls back to the support level we expect the price to bounce and

move upwards we also see that the macd line is below zero showing signs of support we spot this doji right at the support

level and enter a Buy trade and as you can see the price shoots up and trades higher here is a sell trade here the price was in a downtrend as it

moved lower this reversal Point helped us identify a support level then the price broke below it turning the support into a resistance level

when the price pulls back to the resistance level we expect the price to bounce we also see that the macd has moved above the zero line

so we enter a sell trade when we see this evening star Candlestick pattern and as you can see the price moved lower

so this is how you trade using the macd in this video we first understood the uses of the macd indicator then we discussed four Advanced trading

strategies using it if you want us to cover some specific topics be sure to comment below as we appreciate your suggestions also let us

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