The strategy

Moving Average Convergence/divergence, otherwise know as MACD, is a popular indicator used in technical analysis.

It is developed by Gerald Appel with the goal to identify changes in a stock price's strength, direction, momentum, and duration of its trend. Then in 1986, Thomas Aspray further improved the MACD by adding the divergence bar graph (histogram) to the MACD, to help traders easily anticipate MACD crossovers. In other words, today's MACD is a useful tool to help traders identify trends to follow.

In addition, MACD can be used in a wide variety of financial markets: such as stocks, futures, options, currencies and etc.

Like with any other indicators, traders have the option to adjust the MACD's parameters. Some traders prefer to use the (5, 34, 21) settings, (24, 52, 9) settings or etc. Keep in mind, the most commonly used MACD parameters are 12, 26, and 9 days, which is MACD (12,26,9). Often it is advisable for traders to stick to this commonly used parameter because majority of traders also using and thus have a high self-fulfilling prophecy. In other words, if many enough traders use the same settings, the MACD has a higher chance of identifying the right trend.

How to use MACD and when to use it 

The reason why MACD is popular among traders because it is easy to use. The MACD crossover method is one of the most popular method. Whenever the MACD line (red color roughed one) crosses above the signal line (white smooth line), it shows the market has a high probability of going for a long term uptrend. This is called a bullish crossover.

If MACD line crosses below the signal line, it is a bearish crossover, which means high chance the market may downtrend.

Check out the chart below, noticed how MACD helped FCPO traders identify a strong medium term uptrend when there is a bullish crossover in box 1. Subsequently, the crude palm oil then rallied for roughly 2 months and settled at 2,300 before prices remained sideways.

Below is another example. MACD formed a bearish crossover at box 2. The market then had a plunge for 2 months from 1,835 all the way to 1,500!! This simple yet powerful tool helped us traders to be prepared.

I love sharing things which are helpful to traders. Let me share with you another example of how MACD can help you identify strong market trends, especially in FKLI. Check out the chart below, MACD formed a bullish crossover at box 1, and the market rallied from 1,609 to 1,814.

When the market is in a strong trend, besides using MACD to identify the strength of the current trend, you can also use it to identify potential trend reversals. Below is an example on how MACD warned FKLI traders of a potential market downtrend. Before that, the market had a strong uptrend until it reaches 1,720-30 zone. Then the MACD had a bearish crossover, (shown by the red arrow) and told traders FKLI may be starting a downtrend soon.

It also works in other financial markets, check out a few other examples below.

There are plenty of simple yet practical ways use MACD for stocks, futures and other markets, which will be taught in our TFM Program.

When not to use MACD

If you are a regular reader to our blog, you will know by now that there isn't an indicator which works well every time at every market conditions. Similarly, there are times that MACD is unhelpful to us traders. MACD is unhelpful when a market is in a sideways trend.

As you can see in the above example, MACD offered lousy trading opportunities when FKLI stuck in a sideways trend between 1,760 resistance and 1,740 support.

MACD had a lot of false signals when FCPO stuck in a sideways trend between 2,827 and 2,575. It does not give traders a strong & profitable risk to reward opportunities.

Risk management with this strategy 

Like any indicator or naked price action strategy, MACD can generate false signals too. Thus it is important for traders to put stop losses to protect your account. There are 2 things to consider when putting your cut loss when you are using MACD for trading, which is support/resistance and also your risk per trade.

Besides that, traders can also use a variety of approaches to filter out false signals and confirm true ones. In our TFM community, you will learn how we Trend Followers use MACD with other price actions and indicators to get the highest quality trades that easily give us the juiciest trends! You will learn our exact trading method step by step with more price action and technical analysis tips and entries. Happy trading!