So one of us might be under the impression that there is some secret indicator, some secret thing that will tell us which direction the price is going to go. We may also have even stumbled across the MACD strategy.
Today, we will look at one of the highest win rate strategies we can do in trading. Well enough talk, let’s get straight into it.
What is MACD?
So what does MACD even stand for? It stands for moving average convergence divergence. This technical indicator is a technique for identifying moving averages that indicate a new trend, whether bullish or negative.
Why do we need such a strategy in trading?
The answer is really simple. Finding a trend is where the greatest money is produced. However, doing so successfully in practice is far more difficult. The most common dread among trend traders is entering a trend too late, at the point of weariness.
There are two basic strategies when employing the MACD indicator: the crossover approach and the divergence method. We are just overviewing here. So just remember that the MACD indicator is made up of three parts:
This trend following indicator is made up of two lines, the MACD line, and the signal line. These are formed the same way that moving averages have formed.
The lines of the MACD are created using a very precise calculation. But that is not very important for us to know. We just need to know the basics here. In addition to the two lines, a standard MACD also has a histogram. This is represented most typically as objects that look similar to the teeth of a comb. It is a graphical depiction of the MACD Line’s distance from the Signal Line.
The strategy’s fundamental idea is to buy or sell only when the price crosses the moving averages in the trend’s direction. This is because the faster line (MACD Line) reacts first when a new trend emerges, crossing the slower line (Signal Line).
Because there are two distinct “speeds” of moving averages, the faster one will react to price movement faster than the slower one. When this crossover happens, and the MACD line begins to diverge or go away from the slower line, it usually signals the beginning of a new trend.
Applying the strategy
For example, if combined with a 200-day moving average, MACD works extremely well if there is a lot of price movement.
However, the strategy starts to get iffy and give false signals when the chart starts going sideways and losing momentum.
On the other hand, the MACD indicator works extremely well if the market is in a trend.
If we are experienced traders, we probably used or heard about the MACD indicator before. But the MACD indicator by itself is just alright, to be honest. Also, traders who use this approach should only do so on currency pairings that normally trend.
Despite this, many traders continue to favor MACD as a trading technique. The moving average MACD combination approach might help you get in on a successful trend at the right moment. It is very easy to use, works in almost every single market, and most importantly, it makes money.