How To Use The MACD Indicator for Spotting Momentum and Trend

Though the Moving Average Convergence Divergence (MACD) indicator follows trends, you can use it to figure out future trends and measure momentum. Here’s how:

COMPONENTS OF MACD

First things first, let’s understand the components:

1. The MACD (blue) line is calculated thus: 12 Period EMA (minus) 26 Period EMA
2. The Signal (red) line is a 9-Period EMA of the MACD line
3. The Histogram calculates the difference between the MACD and Signal lines
4. The Zero line (note the “0” value on your right).

HOW TO INTERPRET MACD

A. GENERAL INTERPRETATION

1. When the MACD line crosses above the Signal line, the trend is bullish and this is a buy signal
2. When the MACD line crosses below the Signal line, the trend is bearish and this is a sell signal
3. When the lines are above the Zero Line the trend is bullish and when these are below the Zero line, the trend is bearish
4. When the histogram lines lengthen (either way) the momentum (either way) gathers steam
5. When histogram lines are above zero, the trend is bullish.
6. When histogram lines are below zero, the trend is bearish.

B. FORECASTING SHORT TERM TRENDS (V. V IMPORTANT)

1. When the MACD Line crosses above the Signal Line from BELOW the Zero Line, it is a POWERFUL BULLISH signal. USE IT TO TRADE IN ANY TYPE OF MARKET (Choppy, bear, bull).
2. When the MACD Line crosses below the Signal Line from ABOVE the Zero Line, it is a POWERFUL BEARISH signal. USE IT TO TRADE IN ANY TYPE OF MARKET (Choppy, bear, bull).
3. When the MACD Line crosses above the Signal Line from ABOVE the Zero Line, it is a BULLISH signal. It will give you great results when the trend is bullish.
4. When the MACD Line crosses below the Signal Line from BELOW the Zero Line, it is a BEARISH signal. It will give you great results when the trend is bearish.

You can see in the chart how the Nifty spiked and crashed when these lines crossed above and below the Zero lines.

SETTING THE PERIOD

FOR SHORT TERM TRADERS

FOR A RELIABLE MACD SIGNAL, USE THE 1-HOUR CHART. The image above proves that a 1-Hour chart can really leverage the MACD

I recommend that Intraday traders should use the 1-hour period in choppy markets and the 15-minute or 30-minute period when the trend is certain. These periods are more reliable.

CASE STUDY: MACD ON 22-5-18

This is how you work the MACD by and large. Many folks jump into a trade at the first opportunity without setting the right period or acting on false cues such as when the Histogram draws a line above the zero line.

Ideally you should use the MACD for trend spotting and then measuring the momentum after the trend proves true.

All the tools that you need to interpret the MACD are right up there. Give it a shot and do some paper trades and see how it goes.

Feel free to ask questions in the comments section.