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Mechanical movements in the financial market can be well-understood via a set of technical indicators. One such effective tool loved by traders globally is the Moving Average Convergence Divergence (MACD). It offers insight into trend direction, momentum, and potential reversals. Understanding how to find trades using some uniquely powerful MACD combinations is undoubtedly an asset to anyone involved in trading. This article focuses on explicating the strategies that involve these combinations.
MACD – Defined
For starters, MACD is a trend-following momentum indicator that indicates the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-day Exponential Moving Average (EMA) from the 12-day EMA, forming the MACD line. A nine-day EMA of the MACD, called the signal line, is then plotted on top of the MACD line, which operates as a trigger for buy and sell signals. The MACD histogram represents the difference between the MACD line and signal line.
MACD Zero Line Crossover
MACD zero line crossover is the first combination addressed here. The zero line is simply the spot where the signal line and MACD lines intersect. When the MACD line crosses above the signal line, this predicates upward momentum and a bullish market, indicating it may be time for traders to buy. Conversely, when it crosses below the signal line, it indicates a bearish market and a sell signal.
MACD Divergence Convergence
MACD Divergence Convergence is another unique and powerful combination used by traders. When the price of a security is making higher highs, but the MACD is making lower highs, a bearish divergence is signified. This indicates that the upward momentum is slowing and a trend reversal may be on the horizon. Conversely, when the security’s price is making lower lows with the MACD making higher lows, it represents bullish divergence, suggesting an upward price reversal.
Dual Time Frame MACD
Dual time frame MACD strategy is an interesting yet potent combination that trades can use. This technique is all about combining MACD signals from two different time frames. By using a longer time frame, traders can decipher the bigger trend, while the shorter time frame can reveal a potential entry and exit point. This strategy helps to ascertain the prevalent trend and make the most out of short-term price changes.
MACD and Relative Strength Index
Pairing the MACD with the Relative Strength Index (RSI) can be quite a force to reckon with. The RSI measures velocity and magnitude of price movements and is expressed in a range between 0 and 100. Typically, an asset is considered overbought if the RSI is above 70%, and oversold when it’s below 30%. When the MACD denotes a buy signal, the trader will then wait until the RSI backs this up by also moving above 30%. Vice versa, when the MACD provides a sell signal the trader will wait for the RSI to shift below 70%.
And thus, intertwining MACD and RSI allows traders to discern exact market movements. The potent combinations proffered by MACD are indeed an invaluable asset in a trader’s toolkit. Remember, thorough understanding and practice are key to applying these tools effectively to capitalize on market opportunities.
