MACD day trading strategy is one of many strategies day traders utilize. Using technical indicators as part of a day trading strategy is pretty common. Technical indicators can provide traders with information regarding volume, price movements, volatility, overbought and oversold market conditions, trend direction, and consolidation, which can help determine the market atmosphere.
There are many technical indicators out there to utilize, such as Bollinger Bands, RSI (relative strength index), and the MACD indicator. When combined with a day trading system, they can be quite effective and give enough information to provide an edge to implementing trading opportunities in any market condition.
In this article, we are going to focus on the popular MACD indicator. We will discuss what it is, its components, and how to use the indicator’s information.
What Is the MACD?
The MACD is a technical analysis tool that was created by Gerald Appel in the late 1970s.
Mr. Appel successfully managed investments for various clients for over 35 years and wrote 17 books in relation to investing. Here we are over 40 years later and the MACD indicator still proves to be favored and useful!
The MACD, or moving average convergence divergence, is a trend following momentum indicator used to capture the direction of the market, so traders can take advantage of trading with the trend. Moving average refers to a stock’s average price. Convergence means coming together or crossing. Divergence means dividing or separating.
As a momentum oscillator, it can be informative and disclose changes in the strength, direction, and duration of a trend in an underlying stock price. This information allows traders to interpret if the financial markets have bullish or bearish momentum, and if the price movement is strengthening or weakening.
MACD day trading strategy can be a versatile tool in your trading, but like many other indicators, the MACD is considered to be a lagging indicator, meaning it collects and then reacts to market information that has already taken place.
3 Key Components of the MACD Indicator
1) MACD line
2) Signal line
1) MACD Line
The MACD line is the relationship between two exponential moving averages or EMA’s. It is calculated by subtracting the long-term 26-period EMA from the short-term 12-period EMA. Most trading platforms have this indicator available for use, so no calculations are required. Just check your platform’s MACD default settings! (Blue line in below picture.)
2) Signal Line
The MACD signal line is a 9-day EMA that overlaps the MACD line. A signal line crossover can provide insight to trade entries and exits. (Orange line in below picture.)
The MACD histogram is a graph that provides a measure between the distance of the MACD line and the MACD signal line with a baseline of zero. The measure can illustrate to traders if bullish or bearish momentum is high.
When the trend is falling, the red bars will signal below the zero baseline with negative readings. The MACD line will be below the signal line.
When the trend is rising, the bars will be green above the zero baseline with positive readings. The MACD line will be above the signal line.
(Green bars above and red bars below the zero baseline.)
How to Use the MACD Information
Since the MACD indicator can provide a variety of information day trading with MACD strategy can be useful. Traders tend to use the data according to their trading style, whether that be intraday trading, swing trading, or long-term investing.
The indicator will work on any given time frame on a chart. It is advisable to practice and test the use of the indicator with your trading strategy to gauge effectiveness.
Most see trade opportunities based upon crossovers, divergence, and rapid rise and fall displayed on the oscillator.
When considering trade opportunities using the MACD indicator, crossovers can suggest buy and sell signals. A trader is looking for an occurrence of when the MACD line crosses the signal line.
When the MACD line crosses below the signal line, the information conveyed is bearish, or price movement may fall. When the MACD line crosses above the signal line, the intent is bullish, or price action may be on its way up!
Depending on where the convergence takes place, above or below the zero line, it can emphasize the strength of a bullish signal or bearish signal. A bearish crossover will be more significant if the crossover occurs in the positive region. A bullish crossover will be more notable if the crossover occurs in the negative region.
The concept behind this is mean reversion. When price action moves too far away from an average, it will most likely retrace back. The more distant the MACD line travels above or below the baseline or zero line, the more it demonstrates the distance between the moving averages. This can be an indicator of price correcting to the mean average or trend reversals to soon follow.
When you think of divergence as mismatched information or separation, it is easy to spot on a chart.
When the MACD generates highs and lows that conflict with the highs and lows on an asset’s price chart, it is divergence. Basically, the MACD is moving in the opposite direction than the price on the chart, denoting disagreement.
A bullish divergence develops when the MACD forms higher lows that correlate with lower lows on the price chart. A bearish divergence emerges when the MACD forms lower highs that correspond with higher highs on the price chart.
When the MACD movement is in disagreement with the price on the chart, a trader can anticipate possible trend reversals.
MACD Rapid Rise and Fall
A rapid rise and fall in the MACD indicator that correlates to price movement on a chart can signal overbought or oversold market conditions. When this occurs, the short-term moving average pulls away from the longer-term moving average. The market tries to then correct itself, and the price may attempt to find its way to average means.
The downfall of this is that the financial instrument can remain overbought or oversold for a period of time. Most use other indicators such as RSI, the relative strength index, to confirm and validate these signals.
Important to Note
It is important to note that false signals are possible. Sometimes the market is just correcting for a brief moment, consolidating, and then proceeding with the initial price trend.
It is always advisable to use the MACD indicator and the signals it generates with other means of confirmation to make trade decisions.
Summary: MACD Day Trading Strategy
The MACD indicator, or moving average convergence divergence, is a valuable tool to utilize for various information regarding bullish or bearish momentum, price movement, trend continuations and reversals, and possible overbought or oversold market conditions.
Although Day Trading With MACD Strategy is a lagging indicator, it can provide confirmation and reliable data to consider trades when used with other trading strategies.
Like all indicators, practice using them in combination with your personal trading strategy to measure their effectiveness. Trading has significant risk associated with the career, so trade only with capital you are willing to lose.
Resources to Check Out
Check out this article:7 Best Day Trade Indicators
To Learn More
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