From personal experience (and like I’ve mentioned before), I can tell you that a lot of people find the MACD indicator complicated and avoid using it for that exact reason.
But in reality, it’s one of the most simple indicators to use… once you understand the different parts of it, that is.
In this tutorial, I thought I’d spend some more time showing you how to use the MACD indicator so you can become more familiar with it.
This time, I’ve broken it into three different parts…
How to Use the MACD Indicator: The Centerline Crossover
The centerline crossover is one of the most popular tools when learning how to use the MACD indicator.
It occurs when the MACD moves above the zero line and turns positive.
This happens when the 12-day exponential moving average of the underlying market or stock moves above the 26-day EMA.
A bearish crossover occurs when the MACD moves below the zero line to turn negative. This happens when the 12-day EMA moves below the 26-day EMA.
How to Use the MACD Indicator: Label Everything
Before I begin my analysis, I label each part of the MACD indicator to avoid any confusion.
When figuring out how to use the MACD indicator, you’ll notice it has three parts that all work together.
First, we have the MACD line.
This is the indicator that provides the difference between the 12-and the 26-bar moving average that you see on the chart below.
The sole purpose of the MACD line is to show a visual representation of the difference between the two moving averages.
The next line is the signal line, and its sole purpose is to create a smoothing of the MACD Line.
The third part of the MACD indicator is the histogram.
The chart below is a visual representation of the difference between the MACD line and the signal line.
The wider apart the MACD line moves away from the signal line, the more activity you’ll see on the histogram.
If there’s little or no distance between the MACD and signal lines, then you would see little or no action on the histogram.
How to Use the MACD Indicator: Let’s Make Things Easier
When learning how to use the MACD indicator, it’s sometimes easier to think of it as both an external and internal tool.
That means the MACD line represents what’s currently happening in regard to market price.
However, the signal line and the histogram are internal and only react to the indicator instead of the market.
So I like to call the signal line and histogram indicators for another indicator.
In this exercise, we won’t be using the signal line or histogram. So you only need to focus on the MACD Line.
I’m going to turn on both of the moving averages so you can see how the centerline crossover signal is generated.
How to Generate Signals
Pay attention to the moving averages and notice what happens each time they cross each other on the way up and down.
Each time the moving averages cross each other, the MACD Line crosses either above or below the centerline.
The centerline is just a middle ground zero area. And each time the MACD line moves north of it, it means the short-term or fast-moving average has crossed above the slow-moving average.
In our case, the 12-day moving average is the fast-moving average, and the 26-day moving average is the slow-moving average.
Now, each time the MACD line moves south of the centerline, the slow-moving average has crossed above the fast-moving average… And as a result, the trend turned down.
Things to Keep in Mind
When learning how to use the MACD indicator, it should be looked at as two different indicators…
An external indicator that reflects price, and an internal indicator that reflects what the MACD does, avoiding price completely.
By understanding each part of this tutorial, you should be able to see how all of the different pieces work together.
If you’d like to learn more about the MACD indicator, check this page out: The Best MACD Trading Tactics for Beginners.
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All the best,
Senior Strategist, WealthPress