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the macd indicator explained

The MACD is short for moving average convergence/divergence. It's also known as a momentum oscillator. It was developed in the late 70's by Gerald Appel. It is best used in non-trending markets (the price fluctuates within a certain range).

The MACD can be used to trade stocks (like AAPL, for instance) or even forex like the EUR/JPY pair, for instance.

A +ve MACD (pronounced Mac-Dee) indicates a bullish trend (upward movement), whilst a -ve MACD corresponds to a bearish trend (downward).

How to use the MACD

From the video above, you should be familiar with the signal line, as well as the MACD line, and the bar chart (sometimes referred to as the histogram). So, when should you BUY or SELL from looking at the MACD indicator ? 

  • When the MACD line (blue line) crosses above the signal line (orange line), this generally means you should place a CALL option.

  • When the opposite occurs, you place a PUT (sell) trade.

The MACD oscillator is more valuable when the signal line and MACD line are far away from the zero line. For example, when it's way below, this is normally indicative of an impending trend reversal, and one would typically place a CALL option (Buy). When it's way above, you should get ready to place a PUT option (Sell).

Before we go on, if you haven't yet downloaded the platform to practice your trading, you can go ahead and do that right here. You get $10,000 to practice with, and when you're ready to invest real cash, you can start with as little as $10 only (although it's recommended to start with more than that).


macd divergence strategy

One of the ways traders utilise the MACD to their advantage is by employing what's known as the divergence strategy. When the price chart and the MACD show opposing movements, this usually signals the beginning of a trend reversal. Now, is this always the case ? Of course not.  Divergence can be a sign of a trend reversal. It's best to use the MACD in tandem with the other indicators at your disposal. Some traders like to use the MACD together with the Alligator.

signal line crossovers

When the MACD crosses the signal line (in an upward direction), a bullish trend can be expected. The opposite is expected when it crosses the signal line downwards.

MACD crossover strategy.

centreline crossover

When the MACD line crosses the zero line (horizontal line of histogram/bar chart) from below, to become positive, a bullish trend is expected (place a CALL option). When it goes below, to turn bearish, one would typically place a PUT option.

MACD centreline crossover.

Any serious trader never uses just one indicator, and this applies to the MACD as well. Use it in conjunction with the myriad others you can find on the platform. 

A trader must always watch for asset volatility, and there's an indicator that does just that. It's known as the ATR (Average True Range). Learn more about it here.

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