Top MACD Trading Strategies
Moving Average Convergence Divergence (MACD) strategies enable traders to measure market momentum and trend strength. They help determine where the market trend is headed and also provide continuation or reversal signals. In this article, we discuss the top MACD trading strategies in-depth.
What is Moving Average Convergence Divergence?
Moving Average Convergence Divergence (MACD) is a trend-following technical indicator that provides traders with the relationship between a slow-moving (26-period) average and a fast-moving (12-period) average, which helps them trade bullish or bearish markets. The MACD line is the difference between these two moving averages, whereas the signal line is a 9-period moving average.
- When the MACD line crosses the signal line from below, it signals traders to place long orders due to the expected uptrend.
- When the MACD line crosses the signal line from above, it signals traders to place short orders due to the expected downtrend.
How does MACD work?
MACD trading works by using the two moving averages and a histogram. When the two moving average lines come together, they are called converging lines. When they move away from one another, they are known as diverging lines. The difference between these two moving averages is shown on the histogram. There is also a zero line on the chart, which divides the chart into positive and negative areas.
- Whenever MACD trades above the zero line, an uptrend is confirmed, signalling traders to long their positions.
- Whenever MACD trades below the zero line, a downtrend is confirmed, signalling traders to short their positions.
Trading strategies using MACD
MACD Histogram strategy
The MACD histogram is one of the most popular MACD trading strategies consisting of a histogram, which represents bars as the difference between the MACD line and the signal line. The histogram expands in height whenever the currency pair prices fluctuate aggressively, whereas the height decreases when market prices slow down.
- When the histogram bars move away from zero, the two moving averages also move away from each other, indicating a potential market reversal.
- When the histogram bars move close to zero, the two moving averages also move close to each other, indicating a potential market continuation.
MACD Relative Vigor Index strategy
This strategy consists of a Relative Vigor Index that compares a currency pair's closing price to a price range between its highest and lowest price. This strategy helps traders identify overbought and oversold market zones. MACD is combined with this indicator to confirm the current trend’s strength in the market. When both indicators cross in the same way, it sends traders a signal to long bullish markets and short bearish markets.
MACD and Money Flow Index Strategy
The Money Flow Index (MFI) helps in technical analysis by focusing on the price and volume of the currency pair to spot oversold or overbought market conditions. When combined with MACD, the overbought or oversold conditions are confirmed.
- When the MACD line crosses the MFI in a bearish market trend, it confirms that the stock is overbought and signals traders to short the trade.
- When the MACD line crosses the MFI in a bullish market trend, it confirms that the stock is oversold and signals traders to long the trader.
Zero crosses strategy
The zero crosses strategy is also one of the popular forex trading strategies using MACD, which is based on the moving averages crossing the zero line from above or below. The zero line in MACD is the centreline and how far apart the MACD line is from it indicates how strong the trend signal is.
- When the MACD line crosses the zero line from below, it indicates an uptrend and signals traders to place buy or long orders.
- When the MAC line crosses the zero line from above, it indicates a downtrend and signals traders to place sell or short orders.
MACD and Divergences strategy
You can trade the MACD indicator with its divergence strategy by using the MACD histogram. You can spot the new swing highs or lows on the chart and compare it with the histogram where the bars do not reach the high or low level, indicating a price and momentum divergence.
- If the currency pair price chart is showing consistent swing lows in the market, indicating a downtrend, but the histogram does not touch similar prices, it indicates that there is a possibility for an uptrend reversal. This provides traders with a signal to place long orders.
- If the currency pair price chart is showing consistent swing highs in the market, indicating an uptrend, but the histogram does not touch similar prices, it indicates that there is a possibility for a downtrend reversal. This provides traders with a signal to place short orders.
Trade the forex market with MACD strategies today
MACD strategies help traders identify the ideal entry levels in strong bullish markets and exit levels in strong bearish markets, enabling them to place successful trades accordingly. MACD is an indicator that can be combined with various other signals to get a signal confirmation. Start trading currency pairs with Blueberry Markets’ forex trading platform in Australia to access real-time trade signals, tight spreads, and 24/7 support. Sign up for a live trading account or try a risk-free demo account.
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