There are many technical analysis tools on the trading platforms. Some are more popular than others. Today, I will present one of the most commonly used ones. It is called the Moving Average Convergence Divergence. MACD is one of the oldest technical analysis indicators. It is built in all trading platforms. And of course, we have it also on IQ Option.
The MACD components
There are three elements of the MACD indicator. You can see them in the graph below.
The first one is the MACD line and this is the exponential moving average with a period of 12 minus the EMA with the 26 period.
The second one is the MACD Signal Line and this is the EMA9 calculated from the MACD line.
The third one is the MACD Histogram which shows the difference between the MACD and the MACD Signal Line.
The MACD indicator in action
The tool described in this article is a versatile indicator that follows the trend. You have three possible ways of interpreting the MACD.
Crossovers of the moving averages
In this method, you are focusing on the points of two EMAs crossovers. The situation when the EMA12 intersects the EMA26 is a signal to open a transaction.
As was said before, the MACD line is calculated from both EMAs, that is EMA12 and EMA26. When the EMA12 crosses the EMA26 from above and continues below it, the MACD line drops below the 0 value.
When the EMA12 crosses the EMA26 from below and continues above it, the MACD cuts the 0 value from beneath.
Check this out on the exemplary chart below. Of course, you don’t need to use additional EMA’s on your chart. We have them below just to show you that when they cross each other the MACD line crosses “0” level.
The signals generated by the MACD
A signal to buy is produced when the MACD line cuts the 0 line from below. In case the MACD intersects the 0 line from above, you should go short.
These signals can be delayed. This problem is common with every lagging indicator based on moving averages.
That is why a better way to recognise the right moment to open a position is to look for the points where the MACD line intersects the MACD Signal Line. When the MACD line crosses the MACD Signal Line from below, you should open a long transaction.
When the MACD cuts the MACD Signal Line from above, this is a signal to enter a short trade.
The MACD Histogram
The MACD Histogram is calculated by subtracting the MACD Signal Line from the MACD line. You will observe divergence and convergence here.
Divergence occurs when the histogram is growing. It happens when the MACD is moving faster in the direction of the trend.
Convergence is when the histogram is getting smaller. At the same time, the market is slowing down and so the MACD line is nearing the MACD Signal Line.
Note that both, divergence and convergence, may take place in whatever direction. The histogram may rise or shrink below or above the 0 value.
Take a look at the picture below. There are letters “T” and “B” marked. T represents the tops of the histogram and B the bottoms. They occur almost simultaneously with the tops and bottoms that the Unilever is forming on the price chart.
The signals generated by the MACD Histogram
A signal to buy is generated when the histogram forms the bars below the 0 value and starts to converge in the direction of the 0 line.
You should open a sell position when the histogram’s bars are created above the 0 line and start to converge in the direction of that line.
The MACD Divergences
The third way of interpreting the MACD indicator is through its divergencies. They may be characterised as bearish or bullish.
The bearish divergence happens when the MACD indicator is implying a decrease in the price, but in reality, the asset price continues upwards.
We are talking about the bullish divergence when, according to the MACD, the price should rise, but when you look at the chart price, it is actually falling.
The bearish and bullish divergences can be read as signals to withdraw from a long or short transaction.
Let’s focus for a moment on the above chart for the AUDUSD currency pair.
The first situation illustrates the bearish divergence. The price made a higher high (from H#1 to H#2). Yet, the second high of the MACD indicator is not higher than the first one. This signals a possible change in the market direction.
Then, there is a bullish divergence. The price reached the lower low (from L#1 to L#2). At the same time, the MACD remained stable. L#2 is not lower than L#1. And after that, the price formed even lower low L#3. However, L#3 of the MACD is higher than the previous L#2. This also signals a possible reversal of the trend.
The lows and highs of the MACD indicator compared to the lows and highs of the asset price can be also used as a confirmation of the direction of the market. Such a confirmation occurs when both, the MACD and the price, make lower lows or higher highs at the same time.
The Moving Average Convergence Divergence is a versatile technical analysis tool commonly used by the IQ Option traders. It produces signals to enter buy or sell positions. It can be interpreted in multiple ways and thus gives wide possibilities. The MACD warns the traders of the changes in the trend, but can also serve as the confirmation of the current market direction.
Remember, it is a good idea to practice implementing new indicators on the demo accounts. It costs nothing on IQ Option and helps to improve your trading skills.
Best of luck!