MACD & Momentum trading Strategies | How To Use the MACD

Do you want to know more about MACD and momentum trading strategies? Watch our latest video and get profitable trading results!

Momentum trading strategies – A simple explanation

When looking at the MACD, or the Moving Average Convergence Divergence indicator, you are looking at one of the most popular indicators used by technical analysts in all fields. The first thing you need to understand is exactly what this indicator is. It has a signal line, which ironically most traders completely ignore. However, you also have a histogram, and that’s where people tend to focus on.

The indicator is simply the measure of the space between 2 moving averages. In this video, I have the 4-hour chart of the New Zealand dollar versus the Swiss franc. I have the 12 and the 26 moving average plotted on the indicator, even though the moving averages don’t show up on the chart. When I do put them on the chart though, you can see that they are spaced out in relation to the MACD. In other words, as the momentum is going to the upside with the shorter-term moving average rising above the longer-term moving average, the histogram rises. The wider the space between the 2 moving averages, the larger the histogram goes in whichever direction the momentum is flowing. At the same time, you have to keep in mind that the zero line will be crossed every time that the moving averages across. And again, you have the 9 moving average used as the dashed red line on the indicator, but typically most people don’t use that as it tends to clutter up the signals.

One thing you have to pay attention to though is whether or not you have a trending market. After all, this is an indicator that relies on moving averages, which of course rely on some type of trend. With that, using the MACD in a range bound market is a good way to lose money.

Another way that people use the indicator is to spot divergence. Divergence is simply when price is going in one direction and the momentum on the indicator is going in the other. On the chart, you can see that price was falling while the histogram was going higher over the course of several candles. That typically suggests that momentum in that particular direction is running out and can be the first sign of a trend reversal.