TA Beginner Friendly — MACD
“Moving average convergence — divergence “
Today, we go over the MACD how it works and how to use it! “Moving average convergence — divergence” is what the acronym stands for. This is a LAGGING Indicator.
Also, in case you missed, check out the previous TA tutorial — 8/21EMA (a LEADING indicator):
Content converted from the thread by Professor Keith on Twitter.
The lagging indicator
As a LAGGING indicator, this is meant to work with a leading indicator (8/21EMA), not by itself. There are a few parts, all easy to understand. The 2 lines are moving averages, one slow (orange) and one fast (blue). The orange is the “trigger” line. Blue is the “crosser”
How to read the MACD signal?
Convergence
When the — crosser- breaks UP thru the -trigger- (blue up thru orange) this is CONVERGENCE and a bullish cross. This can be tricky also as there is a MIDLINE from bearish — to bullish also. When in BEARISH trading, be more careful to make sure you have a good 8/21 ema signal.
Divergence
As the moving averages separate, this is DIVERGENCE and a signal to prepare for a potential reversal (either way high or way low). When they separate TOO MUCH, expect them to CONVERGE (back together) rather quickly. A smooth arc is preferred in either direction (2nd pic)
Histogram
The next part is the histogram. The darker bars mean — more buyers (green) that the day before and more sellers (red) than the day before. Light green and dark green mean LESS buyers/sellers than the day before. You want the histogram to match the crosses like the pic below.
Midline
The last part is the moving averages crossing the midline. This acts a sentiment provider. Both OVER midline — more bullish than bearish. Both UNDER midline — more bearish than bullish. We PREFER all bullish zone. In the pic, we can now up our risk a bit, as sentiment is good.
Combine 8/21 EMA and MACD
Let's add it with the 8/21 EMA. we use MACD after 8/21 signal. As you see the MACD was early here, but in the bearish trading zone. 8/21 signal came 7/28/21, macd had a bullish cross 7/24/21 so it provides a confluence for our buy signal. Now, when to sell?
Here on 9/8/21 the 8/21 EMA signals SELL. A full week before, we saw a bearish cross on the MACD and before that, divergence formed WARNING us. In this situation, I MAY take 10% or 15% profits on the BEARISH macd cross, as the 2nd pic shows an EPIC run up. (Being safe).
How much $ did we make? A $1000 buy nets us $890 here in profits, after a MINIMUM 89% RUN with a fairly safe strategy. Risk a little sooner with the MACD, take profits a little sooner, you grab another 50% in profits — with more risk.
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Acknowledgment
Content converted from the thread by Professor Keith on Twitter. Follow him for more quality content, including alpha, research, and trend.
