Trading And Understanding MACD Indicator
MACD is moving average convergence divergence which was created in 1979 by Gerald Appel (BTW, click here for our overview of the basics of technical analysis if you need that first). At the time he was among the most popular of the technical indicators in trading. The simplicity of this is appreciated by many traders around the world because it is simple and flexible. They use it as an indicator of momentum or trends.
One of the more popular ways to use this histogram is by trading divergence. The only problem with this is the fact that it's not very accurate which causes it to fail more than it succeeds. We think the more logical method is to use this for both trade entry and exit signals rather than only using it to look at the entry which is the more common way, and examining how traders of currency take advantage of that strategy.
The basic concept is pretty straightforward which makes it reasonably easy to get started. It requires calculating the difference between 12 and 26 Day Exponential Moving Average (EMA) to achieve a positive return. The faster choice is the 12 Day and that makes the 26 day is the slower choice. Both of these methods use the closing price during the period being measured. A nine-day EMA is plotted and it is used as a trigger to make buying and selling decisions. The Moving Average Convergence Divergence is considered a sign to buy if it goes above the 9 day Exponential Moving Average. If it goes below it then that is a signal to sell.
This histogram is a perfect visual representation of the differences between the MACD and the nine-day Exponential Moving Average. If the Moving Average Convergence Divergence goes above the nine-day Exponential Moving Average then it's positive and if it goes below it then it's negative and that tells the trader what to do. When prices are on the rise the histogram will grow bigger and this results in the price accelerating. The contracts then decelerate. When prices are falling then the principal works in reverse and these facts help the trader make profitable decisions.
This figure shows the histogram as the price accelerates and the lower part of the screen shows it making new lows. This particular histogram is why there are so many traders that rely on it as an indicator that measures momentum which they find helpful for decision making. It's a very good way because of how it responds to the movement and price and the speed of that movement. The typical trader uses it more often to determine the strength of the price move rather than the actual direction of the trend.
Trading Crypto Divergence
This is the classic way that traders use the MACD histogram as an indication of what they should do. They will find the chart points where the price makes a new movement, high or low, where the histogram doesn't. This is an indicator of divergence between the momentum and the price and this tells them what they should do. You'll see an illustration of this in figure 2.
Figure 2 shows a negative divergence trade. The price movement goes high as indicated at the right side circle but the other circle point fails to exceed its previous high. You'll find the high that the histogram reached by looking at the lower left side circle. The divergence shows that the price will soon reverse at the new high and that signals the trader that they should short the position.
This type of divergence trade is not accurate enough and that causes it to fail more often than it will succeed which is problematic. This is because prices will often have several final bursts in either direction which triggers stops which then forces a trader out of their position moments before the move actually takes a sustained turn allowing the trade to be profitable which is what is wanted. You'll see an example of this type of fake out in figure 3 which has been a great frustration too many traders over the years and continues to be a frustration.
Figure 3 depicts a typical fake out. The right circle illustrates a strong divergence near the bottom of the chart, close to the vertical line. Any trader who places their stops when the price swings high would be taken out of the trade before it would be able to be favorable for them. This, of course, prevents a profitable return and is, therefore, seen as a loser. The source of these charts is made possible by FXTrek Intellicharts.
How To Use The MACD Histogram With The Entry And Exit
It's possible to use the MACD histogram for entry and exit signals and doing so can resolve the inconsistencies which is what a trader wants. To do this requires trading the negative divergence by shorting the position at the beginning point of divergence. Then, instead of placing the stop where it swings high, it should be stopped out of the trade only if the high goes over its previous high. This is because that is an indication that the momentum is starting to accelerate and the trade was a wrong choice. If the histogram does not reach a new high then the trader can increase their position which allows them to get a higher average for their short. Using it this way is how it is a good strategy.
The ones that are best positioned to take advantage of this strategy are currency traders because it's advantageous to have a larger position because this increases the possible gains when the price reverses. In forex trading, it's possible to use this strategy with any size position without having to worry about having any impact on the price which is often difficult when using other strategies. It's possible to have transactions as big as a hundred thousand units and as little as a thousand units and the spread is usually three to five points.
A trader will have to average up even though the prices are temporarily going against them. The average investor considers this a bad strategy. There are some books on the subject that suggest this is just adding to your overall losers. Even so, there are good reasons for doing this strategy. When the histogram shows that divergence, it indicates that the price could soon turn. The trader is calling it a bluff and investing accordingly. An experienced trader can take advantage of the fixed costs in FX and they can withstand any temporary drawdowns and wait out the turn in price to their advantage. An example of this strategy is shown in figure 4.
The chart shows an example of the price reaching successive highs while the histogram does not. This is an indicator that a decline will come. When a trader averages up there short they can get a handsome profit. This is because the price will make a sustained reversal at the last point of divergence. We are always building out our academy pages to make sure there is relevant and useful information here for you, alot of this we ahve sourced from investopedia and made directly available to you here!
What's The Bottom Line?
There is no absolute black and white in trading. There are rules that traders typically follow on blind faith like the notion to never add a loser but doing so can allow for extraordinary profits. To do it successfully will require having a very logical approach if you're going to violate proven management rules for big gains. When using this strategy the MACD can indicate something different than the price offers and allow for trading divergence. It's a great way to scale up your position as a trader in the FX Market. Many Day Traders also find this an intriguing approach.
Disclaimer for The Arcane Bear
If you require any more information or have any questions about our site’s disclaimer, please feel free to contact us at our help desk email@example.com
Disclaimers for www.arcanebear.com
All the information on this website is published in good faith and for general information purpose only. www.arcanebear.com does not make any warranties about the completeness, reliability and accuracy of this information. Any action you take upon the information you find on this website (www.arcanebear.club), is strictly at your own risk. www.arcanebear.club will not be liable for any losses and/or damages in connection with the use of our website.
The information provided a The Arcane Bear and accompanying material is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs.
The Arcane Bear does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. To the maximum extent permitted by law, The Arcane Bear disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.
Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.
From our website, you can visit other websites by following hyperlinks to such external sites. While we strive to provide only quality links to useful and ethical websites, we have no control over the content and nature of these sites. These links to other websites do not imply a recommendation for all the content found on these sites. Site owners and content may change without notice and may occur before we have the opportunity to remove a link which may have gone ‘bad’.
Please be also aware that when you leave our website, other sites may have different privacy policies and terms which are beyond our control. Please be sure to check the Privacy Policies of these sites as well as their “Terms of Service” before engaging in any business or uploading any information.
By using our website, you hereby consent to our disclaimer and agree to its terms.
Should we update, amend or make any changes to this document, those changes will be prominently posted here.
Thank you, you have no become a part of the development of our new trading space together.
For this, we are extremely Grateful!
The Entire Bear Council
The information on this site is for educational purposes only and is not investment or financial advice. Please do your own research before making any investment decisions. None of the information on this website constitutes, or should be relied on as, a suggestion, offer, or other solicitation to engage in, or refrain from engaging in, any purchase, sale, or any other any investment-related activity with respect to any cryptocurrency or other transaction.
Cryptocurrency investments are volatile and high risk in nature.
Don't invest more than what you can afford to lose.
We are not paid to do any reviews, but we do take positions in projects that we believe are promising.
Arcane Bear makes no representations, warranties, or assurances as to the accuracy, currency or completeness of the content contained in this website or any sites linked to or from this website.
Terms and Conditions
PLEASE READ THESE TERMS AND CONDITIONS ("TERMS") CAREFULLY BEFORE USING THE SERVICES DESCRIBED HEREIN.
BY UTILIZING THE WEBSITE LOCATED AT www.arcanebear.com ("WEBSITE") AND PRODUCTS THEREIN, YOU ACKNOWLEDGE THAT YOU HAVE READ THESE TERMS AND CONDITIONS AND THAT YOU AGREE TO BE BOUND BY THEM. IF YOU DO NOT AGREE TO ALL OF THE TERMS AND CONDITIONS OF THIS AGREEMENT, YOU ARE NOT AN AUTHORIZED USER OF THESE SERVICES AND YOU SHOULD NOT USE THIS WEBSITE OR ITS PRODUCTS. ARCANE BEAR RESERVES THE RIGHT TO CHANGE, MODIFY, ADD OR REMOVE PORTIONS OF THESE TERMS AT ANY TIME FOR ANY REASON. WE SUGGEST THAT YOU REVIEW THESE TERMS PERIODICALLY FOR CHANGES. SUCH CHANGES SHALL BE EFFECTIVE IMMEDIATELY UPON POSTING. YOU ACKNOWLEDGE THAT BY ACCESSING OUR WEBSITE AFTER WE HAVE POSTED CHANGES TO THESE TERMS, YOU ARE AGREEING TO THE MODIFIED TERMS. THIS DISCLAIMER OR ANY OTHER DOCUMENT, PRODUCED AND SIGNED BY ARCANE BEAR, DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO SELL ANY SHARES OR SECURITIES OR THE PRODUCTS OFFERED THERETO. NONE OF THE INFORMATION OR ANALYSES PRESENTED ARE INTENDED TO FORM THE BASIS FOR ANY INVESTMENT DECISION, AND NO SPECIFIC RECOMMENDATIONS ARE INTENDED, AND ARCANE BEAR SERVICES AND THE WEBSITE ARE NOT, DO NOT OFFER AND SHALL NOT BE CONSTRUED AS INVESTMENT OR FINANCIAL PRODUCTS. ACCORDINGLY, ARCANE BEAR DOES NOT PROVIDE INVESTMENT ADVICE OR COUNSEL OR SOLICITATION FOR INVESTMENT IN ANY CRYPTOCURRENCY AND/OR SECURITY AND SHALL NOT BE CONSTRUED IN THAT WAY. ARCANE BEAR EXPRESSLY DISCLAIMS ANY AND ALL RESPONSIBILITY FOR ANY DIRECT OR CONSEQUENTIAL LOSS OR DAMAGE OF ANY KIND WHATSOEVER ARISING DIRECTLY OR INDIRECTLY FROM: (I) RELIANCE ON ANY INFORMATION PRODUCED BY ARCANE BEAR, (II) ANY ERROR, OMISSION OR INACCURACY IN ANY SUCH INFORMATION OR (III) ANY ACTION RESULTING THEREFROM, (IV) USAGE OR ACQUISITION OF PRODUCTS, AVAILABLE THROUGH THE WEBSITE.
Arcane Bear retains all right, title and interest in all of our intellectual property, including inventions, discoveries, processes, marks, methods, compositions, formulae, techniques, information and data, whether or not patentable, copyrightable or protectable in trademark, and any trademarks, copyrights or patents based thereon. You may not use any of our intellectual property for any reason, except with our express, prior, written consent.
All content included on the Website and associated products and services, such as, but not limited to, text, graphics, logos, and images is the property of Arcane Bear and protected by copyright, trademark and other laws that protect intellectual property and proprietary rights. You agree to observe and abide by all copyright and other proprietary notices, legends or other restrictions contained in any such content and will not make any changes thereto.
Access to the Website
The Arcane Bear Website is provided without warranty of any kind, either express or implied. We do not represent that the Website will be available 100% of the time to meet your needs. In case of interruptions we take all reasonable actions to provide you with access to the Website as soon as possible, but there are no guarantees that access will not be interrupted, or that there will be no delays, failures, errors, omissions or loss of transmitted information. We may suspend use of the Website at any time for maintenance.