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Author Topic: What is MACD(Moving Average Convergence Divergence)? How to use it?  (Read 164 times)
Henri Cartier
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August 10, 2019, 01:14:48 PM
Last edit: August 11, 2019, 06:06:59 AM by Henri Cartier
 #1

Moving average convergence divergence(MACD) is a technical indicator that shows the relationship between 2 moving averages of prices. MACD helps investors to understand whether the bullish or bearish movement in the price is strengthening or weakening.

There is a formula to calculate MACD -

Quote
MACD = 12 Period EMA - 26 period EMA




The 2 commonly used Moving Averages are:

  • Simple Moving Average = Average price of crypto/specific time period = price of crypto for 7 days/7(Example)
  • Exponential Moving Average(EMA): It is calculated based on the latest price data. It reacts to the recent price changes. MACD uses EMA.



Three Components of MACD




1) MACD Line (Blue): It is the differnec between long term EMA(26 period EMA) with short term EMA(12 period EMA).
2) Single Line(Orange): The 9 day EMA of MACD is called "signal" which is plotted on top of MACD line to trigger buy and sell signals.
3) Histogram: The difference between MACD line and Signle Line with passage of time. If the MACD is above the signal line, the histogram will be above the MACD’s baseline. If the MACD is below its signal line, the histogram will be below the MACD’s baseline. Traders use the MACD’s histogram to identify when bullish or bearish momentum is high.


Now Let's see how to use MACD in Trade

There are 2 indicators which we can use to check for buying and selling.
1. Center/Zero Line Crossover
2. Signal Line Crossover

1. Center/Zero Line Crossover: Two important points to be noted here are:
Quote
  • When MACD line crosses above the Zero Line = BUY
  • When it crosses below the Zero Line = SELL





Positive signal: If the MACD line is above the centre line then it is a positive signal.This occurs when the 12-day EMA is higher than the 26-day EMA. In this case, the prices tend to move upwards.

Negative signal: When the MACD line is below the centre line, it is a Negative signal. In this case, price move further downwards.


2. Signal Line Crossover:
Quote
  • When MACD line crosses above the Signal Line = BUY
  • When it crosses below the Signal Line = SELL





Bullish Crossover: It is positive signal that occurs when MACD line crosses over the Signal line in upward fashion. In this period, the prices sores high.

Bearish Crossover: It is negative signal that occurs when MACD line crosses below the signal line.In this period, the prices will drop low.


How to use MACD in trading view?

Step 1: Click on the indicator "~"
Step 2: Search MACD and select the indicator


 

>> I hope this post will help many Newbies and those who do not know how to look at charts for buying and selling. Please share what all methods and parameters do you check while trading? Is this one of the methods do you check while trading?



Source: http://masterthecrypto.com/moving-average-convergence-divergence-macd/
https://www.investopedia.com/terms/m/macd.asp

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August 10, 2019, 01:52:47 PM
 #2

OP your explanation is on 28 period EMA but the images that you inserted have a setting of 26 period.
Can you please have a look at it.

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August 10, 2019, 08:42:50 PM
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 #3

The article is deceptive. The author is selling you snake oil.

Take a look at the second negative crossing circled on the graph. The author wants you to believe that it predicted the long drop that followed. However, notice that the marked crossing was immediately preceded by a positive signal, which the author overlooked because it doesn't support his claims. A person actually following the MACD then would have bought at the top and proceeded to to lose a ton of money.

Also, look at the MACD at the end of the second red period. Again, there is a positive crossing that immediately precedes a swift decline.

The author is cherry-picking the results. If you look at all of the crossings, you will see that half predict the price movement correctly and half predict it incorrectly. In other words, the MACD is no better than flipping a coin.

The Myth of the MACD

The MACD is flawed indicator. If you look at the math behind it, you will see that it provides signals that are nothing more than noise. Simply stated, the flaw results from comparing two lagging indicators whose phases are shifted by different amounts. Furthermore, correcting the shifts results in predictions of the past, and not the future.

What is a Moving Average?

In simplest terms, a moving average (MA) is a "low-pass" filter. It is used to highlight longer trends by removing higher frequency changes. For example, a 12-day moving average smooths out changes that happen more frequently than once every 12 days and keeps changes that happen over periods longer than 12 days. The quality of a moving average as a low-pass filter is mediocre, but it is effective and frequently used because it is so easy to compute.

Moving Averages are Lagging Indicators

If you have ever looked at price graphs with moving averages (MA, SMA, EMA, etc.), you have probably noticed that the averages are shifted when compared to the data. A 12-period MA is shifted by 6 periods and a 26-period MA by 13 periods. If you shift the averages back by that amount of time, you will see that they line up perfectly with the data, as they should, but they will also be that many periods out-of-date. In other words, the 12-period MA and 26-period moving averages calculated now don't tell you what is happening now, they tell you what was happening 6 and 13 periods ago. Moving averages are lagging indicators. They tell you what happened in the past. The shift is done simply for convenience, but it results in the misconception that the value computed now represents the current state when it does not.

What is a MACD?

A MACD is simply the difference between two moving averages with different periods. The result is a "band-pass" filter. For example, subtracting a 26-day MA from a 12-day MA removes the changes that happen over periods longer than 26 days, leaving only changes that happen over periods between 12 and 26 days.

The MACD is flawed

The basic flaw of the MACD is that the two moving averages used by the MACD are shifted by different amounts (6 periods for a 12-period MA and 13 periods for a 26-period MA), and the unequal shifts result in a distortion that creates spurious signals and hides actual signals. Furthermore, if you correct the shifts, the moving averages go out-of-date, making the result of the MACD obsolete by the time it is computed.

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August 11, 2019, 06:11:28 AM
 #4

OP your explanation is on 28 period EMA but the images that you inserted have a setting of 26 period.
Can you please have a look at it.

Thanks for checking. I have corrected it.

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August 11, 2019, 12:41:33 PM
 #5

MACD is kind of smoothed-indicator, that automatically hide lots of important facts about market at different time frame. Using and depending on MACD results in lots of biases in price or trend forecast. I don't use MACD for my daily chart observations. So, I agreed with @odolvlobo.

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August 11, 2019, 07:52:32 PM
 #6

Theoretically when we read the explanation of MACD it looks more like it can give a clear signal to buy and sell and people usually go into this thought that they can book a sound amount of profit. The fact being one indicator is never enough to predict the direction of the market. It is always combination of the indicator that a trader applies on a chart and then places his/her bet.

The article is deceptive. The author is selling you snake oil.

Take a look at the second negative crossing circled on the graph. The author wants you to believe that it predicted the long drop that followed. However, notice that the marked crossing was immediately preceded by a positive signal, which the author overlooked because it doesn't support his claims. A person actually following the MACD then would have bought at the top and proceeded to to lose a ton of money.

Also, look at the MACD at the end of the second red period. Again, there is a positive crossing that immediately precedes a swift decline.

The author is cherry-picking the results. If you look at all of the crossings, you will see that half predict the price movement correctly and half predict it incorrectly. In other words, the MACD is no better than flipping a coin.


Also, as you mentioned there are few crossovers that are overlooked. Such overlooked crossovers might be one of the reasons why the back testing results are completely different from the explanation. Back test results are closer to truth of any indicator in my view. 

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August 12, 2019, 11:02:02 AM
 #7

The author is cherry-picking the results. If you look at all of the crossings, you will see that half predict the price movement correctly and half predict it incorrectly. In other words, the MACD is no better than flipping a coin.

The Myth of the MACD

The MACD is flawed indicator. If you look at the math behind it, you will see that it provides signals that are nothing more than noise. Simply stated, the flaw results from comparing two lagging indicators whose phases are shifted by different amounts. Furthermore, correcting the shifts results in predictions of the past, and not the future.


Thank you for explaining the flaws in MACD indicator. What all type of indicators do you prefer or which parameters or charts do you check for buying and selling cryptocurrencies? This would help me and the Newbies who do not know about it.


MACD is kind of smoothed-indicator, that automatically hide lots of important facts about market at different time frame. Using and depending on MACD results in lots of biases in price or trend forecast. I don't use MACD for my daily chart observations. So, I agreed with @odolvlobo.

The fact being one indicator is never enough to predict the direction of the market. It is always combination of the indicator that a trader applies on a chart and then places his/her bet.

Thanks for sharing your opinion on this. Can I know the different types of indicator or the methods do you use for daily chart observations?



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August 13, 2019, 03:22:02 PM
 #8

Today crash of bitcoin is a good example for useless value of MACD indicator. This indicator usually disguises naive investors and traders. For experienced ones, they don't use that useles indicator. How do you feel about true value of MACD with bitcoin crash began hours ago?

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August 18, 2019, 12:36:21 PM
 #9

I once read a quite comprehensive post about MACD and would like to share it here: https://school.stockcharts.com/doku.php?id=technical_indicators:moving_average_convergence_divergence_macd
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August 18, 2019, 02:20:56 PM
 #10

Guide that are useful for newbie because everything you explain here is just a basic lesson. And for me MACD does not really have high accuracy, I myself only use MACD for additional indicators or confirmation with other indicators. I prefer to draw support and resistance lines or trend lines because it has more accuracy. I hope you can provide a combined guide to MACD, support & resistance lines and other indicators. If there is only one indicator, I think the accuracy is not good enough but your article is already very good for knowledge that is just learning to trade.

Theoretically when we read the explanation of MACD it looks more like it can give a clear signal to buy and sell and people usually go into this thought that they can book a sound amount of profit. The fact being one indicator is never enough to predict the direction of the market. It is always combination of the indicator that a trader applies on a chart and then places his/her bet.

Also, as you mentioned there are few crossovers that are overlooked. Such overlooked crossovers might be one of the reasons why the back testing results are completely different from the explanation. Back test results are closer to truth of any indicator in my view. 

that is why one indicator is not enough, if seen from the picture above there are indeed some crossovers that are ignored but it will be readable if combined with other indicators so that we know every false crossover. Providing an explanation of MACD with past trades is easy but if done directly it might be difficult because we will not know which ones will be false crosses.

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August 18, 2019, 04:05:29 PM
 #11

Guide that are useful for newbie because everything you explain here is just a basic lesson. And for me MACD does not really have high accuracy, I myself only use MACD for additional indicators or confirmation with other indicators.
MACD is very lag-indicator, that gives us trend of the past, not current. MACD is helpful for investors, who can have long-term plans and have determination with their decisions. So, in cases they have incorrect overview on market current trend, if they choose good assests, such as bitcoin, it is sure that they will determinantly hold their bitcoin for months later, to see price recovers.
In contrast, traders need more real-time, instant indicators and signals, that MACD can not satisfy their needs.

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August 18, 2019, 05:59:01 PM
 #12

Similarly to RSI, the MACD simply doesn't work. Well to be totally fair, the RSI does work in very rare instances but you really have to know what you are doing and have a very specific strategy set in mind. You can actually check the charts for yourselves and see how the MACD and RSI can get overextended and still nothing happens for days, even weeks.




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August 18, 2019, 06:39:21 PM
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 #13

Similarly to RSI, the MACD simply doesn't work. Well to be totally fair, the RSI does work in very rare instances but you really have to know what you are doing and have a very specific strategy set in mind.

Oscillators like MACD and RSI are particularly weak indicators because they can't distinguish between range and trend, so following them alone is often a death trap. However, if you use multiple approaches (like candlestick, volume, and MA analysis) in addition to oscillators and look for confluences of bullish/bearish signals, they can be useful at times.

No single indicator should be followed on its own.

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August 18, 2019, 07:26:27 PM
 #14

Similarly to RSI, the MACD simply doesn't work. Well to be totally fair, the RSI does work in very rare instances but you really have to know what you are doing and have a very specific strategy set in mind. You can actually check the charts for yourselves and see how the MACD and RSI can get overextended and still nothing happens for days, even weeks.

RSI for me is easily understood than MACD. MACD looks like a more confusing indica,tor and also a lagging one. You have to be an expert to be able to interpret and use it. I only succeeded in delisting it from trading tools  Grin

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August 19, 2019, 05:03:37 AM
 #15

Similarly to RSI, the MACD simply doesn't work. Well to be totally fair, the RSI does work in very rare instances but you really have to know what you are doing and have a very specific strategy set in mind.

Oscillators like MACD and RSI are particularly weak indicators because they can't distinguish between range and trend, so following them alone is often a death trap. However, if you use multiple approaches (like candlestick, volume, and MA analysis) in addition to oscillators and look for confluences of bullish/bearish signals, they can be useful at times.

No single indicator should be followed on its own.
MACD using smooth techniques so its is for range, not trend. Average range of price over a range of observation time. This one is a very delayed indicator, and should not be used for tradings. It is the same for Bollinger bands, that are another trap for inexperienced traders. Price likely move ups and downs in bollinger bands, but when whales decide to manipulate price, upper or lower bands will be broken fastly. I don't use MACD, RSI, and bollinger bands.

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