MACD indicator was created by Gerald Appel and took the actual formulation similar to the Moving Average. This indicator consists of two parts, namely MACD histogram and MACD line itself. In line, MACD is divided into three parts, namely trigger line, center line, and MACD line.
Basically, MACD shows the direction of the trend and market momentum. In general, MACD is used as:
measuring the strength of the trend that is happening.
measuring market momentum, whether the conditions are overbought or oversold.
As indicator a bullish or bearish divergence. This function is quite popular because the results can be accurate if the signal occurs along with the overbought or oversold market momentum.
There are several display versions of MACD in the trading platform but basically, represent the same parameters. The appearance of the standard version of the Metatrader platform uses an area to declare MACD, but the line version is more popular because it's easy to observe.
In Metatrader, we can install the MACD indicator by clicking Insert >>> Indicators >>> Oscillators >>> MACD. Later the MACD indicator will appear automatically below the price chart.
MACD Main Components
MACD is the difference between the value of the Exponential Moving Average (EMA) period 12 and period EMA 26. The value of this parameter is recommended and always used. This value difference can be displayed in the form of lines or areas such as the display on the Metatrader platform. In addition to the line or MACD area as the main component, to find the right buy or sell momentum, a signal line in the form of a Simple Moving Average is used in period 9. This signal line is made to soften the MACD.
As shown in the picture above, the MACD area widens when the distance between EMA-12 and EMA-26 widens. Note also, when the EMA-12 and EMA-26 lines are the same or intersect (cross), then the MACD value is exactly at the zero lines. Thus, then:
If EMA-12 is greater than EMA-26, then the MACD value is positive and the MACD area is above zero. This indicates a strong uptrend.
When the EMA-12 line is below the EMA-26 line, the MACD value is negative and the MACD area is below the zero line. This indicates a downtrend.
The buy signal occurs when the MACD crossing the signal line from the bottom (number 2 in the image), which is when there is an oversold momentum.
Signals to sell occur when the MACD cuts the signal line from the top (numbers 1 and 3) or when there is overbought momentum.
Exit signal if MACD cuts the signal line in the opposite direction to the entry. If the entry buys at point 2, then exit can be at point 3. Whereas if the entry is sold at point 1, then exit at point 2.
In addition, the MACD indicator can also show trading opportunities that arise from divergent conditions (when prices move in different directions with the MACD indicator.
The Histogram on the MACD Indicator (OSMA)
OSMA (Oscillator's Moving Average) or commonly called a histogram is a difference between the MACD value and the signal line. On the Metatrader standard platform, the indicator that is part of MACD is called OSMA and is presented separately from the MACD indicator; while on other trading platforms, MACD and histograms are displayed together. However, there are also some brokers with the Metatrader platform that make a display that is unified as in the line drawing above.
Actually, OSMA can be used as a separate indicator from MACD. In fact, many traders consider the histogram indicator to be more important than MACD itself. As shown in the picture above, the area of the histogram is positive (greater zero) when the MACD is above the signal lines, and negative when the MACD is below the signal lines. This shows the acceleration of price movements which means the strength of the current trend.
The wider the histogram area, means the price movements will be faster, indicated by the wider MACD and signal lines, so the trend is getting stronger. The area histogram above the zero line indicates a bullish state, while the histogram below the zero lines indicates a bearish state. The peak and valley levels of the histogram also show overbought and oversold levels.
How to Use the MACD Indicator
MACD can be used to determine the momentum transition that is considered strong or weak, it can also be used to find out overbought /oversold conditions on the market which can trigger trend shifts.
This is a typical use of the MA used in the MACD as the MACD line and trigger line. How to read the trend transition from Bullish to Bearish and vice versa is the same as the way we read the trend shift in the MA.
Deviations referred are
That is the condition where the graph gets lower but the indicator gets higher. When there is a convergent graph the direction will go up to go up. So what we do is an open buy. The entry point is when the histogram bar is higher than before after converging.
That is the condition where the graph is getting higher but the indicator is getting lower. After the market divergence occurs, the direction will go back down. The entry point is when the histogram bar is lower than before after divergence occurs.
What needs to be known is that if we enter the market when there is an intersection between the signal lines and the histogram, it is ensured that the market conditions will move from the saturation condition. Divergence is rare, but it's good that we know it so that at least you don't blame the market if there is a false signal.
Then, what happens if there really is a false signal? If there really is a false signal, it's time we change the period of the MACD line and trigger line that we use and don't blame the market.