Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. Traders use the MACD to identify when bullish or bearish momentum is high in order to identify entry and exit points for trades.
The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. The result of that calculation is the MACD line. A nine-day EMA of the MACD called the “signal line,” is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals. Traders may buy the security when the MACD crosses above its signal line and sell or short the security when the MACD crosses below the signal line.
The MACD indicator is shown in the image above. This indicator will appear below the chart in the trading platform. The orange line is the signal line while the MACD line is the blue line. Now let us look at how to get entry signals using the MACD indicator.
Long Position
The long position entry signal is given when the MACD line crosses above the signal line. This shows that price is in an uptrend and a long position would be best in this scenario.
In the image above we see a buy signal given by the MACD indicator where the blue line crosses above the orange line shown by the green arrow. We see the corresponding point on the chart where a long position can be opened shown by the green arrow. A long position opened at this point would be profitable as price moves up after the signal.
Short Position
The short position entry signal is given when the MACD line crosses below the signal line. This shows that price is in a downtrend and a short position would be best in this scenario.
In the image above, we see a sell signal given by the MACD indicator where the blue line crosses below the orange line shown by the red arrow. We see the corresponding point on the chart where a short position can be opened shown by the red arrow. A short position opened at this point would be profitable as price moves down after the signal.
