What is MACD?

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MACD stands for moving average convergence divergence, this trend following momentum indicator is constructed with two moving averages and is used to compare a short term moving average with a longer term moving average to help identify a trend. When the short term moving average is above the long term moving average the trend is said to be in a uptrend, and when the shorter moving average is below the longer moving average the market is in a downtrend. Another useful feature of the MACD indicator is the distance between the moving averages, the wider the gap the stronger the trend, some trading software will have a histogram which changed according to the difference between the moving averages giving you an easy visual of the strength of a trend.

How to trade with MACD

MACD crossover strategy

There are a number of ways to trade using MACD, one of the simplest is the crossover. This is when you buy when the short term MA crossed the long term MA and sell when the opposite happens.

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MACD Crossover strategy

MACD histogram strategy

Another way is to look at the histogram, you can set a target when to buy or sell for example sell when the MA’s are in bearish form and the histogram is at -0.02.

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MACD histogram Strategy

MACD divergence strategy

You can also look for divergence, this is when the price is moving in a  direction to the indicator showing a possible change in trend.

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MACD Divergence strategy

 

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