The Indicator Traders Use To Get An Edge

As a day trader, a holder, or a swing trader, whatever route you decide to take is aimed at being profitable short-term and long-term as well. Losses are inevitable in the market, and price actions will go against you sometimes. Still, your ability to safely predict market movements, trends, reversals to accurately predict or forecast the market's future and find an entry point to climb up the horse and ride the expected direction, hopefully to significant profits.

To be profitable, you must do your due diligence and carry out a well backtested technical analysis of the market, and doing this successfully, indicators can help give a significant edge. One indicator proven to have a high success rate is the MACD indicator.

WHAT EXACTLY IS THE MACD INDICATOR?

The MACD is short for -Moving average convergence/divergence.

The MACD is a momentum oscillator that is mainly utilized for trend trading. Even though it is an oscillator, it usually is not used to identify overbought or oversold positions. It is depicted on the charts as two lines that oscillate freely. The point of both intersection lines generates trading indications similar to those caused by a two-moving average method.

THE METHODS BY WHICH THE MACD INDICATOR WORKS

●      When the MACD crosses above zero, it is considered bullish; it is bearish when it crosses below zero. Second, when the MACD indicator rises above zero, it is bullish. When it falls below zero, it is considered bearish.

●      When the MACD line passes just above the signal line below, the indicator is bullish. The lower underneath the centerline the signal is, the stronger it is.

●      When the MACD line crosses below the signal line from above, the indicator is bearish. The password is stronger farther and farther above the centerline it is.

●      The crossover indications are more significant when the MACD diverges from the price movement.

●      The MACD may be approximated by deducting the value of a 26-period EMA from a 12-period EMA. Put another way, the shorter EMA continually converges on and recedes away from the longer one. As a result, the MACD displays a zero-degree oscillation. The MACD line's 9-period EMA is used to construct a signal line.

●      While in trading ranges, the MACD will pull back, with the short line repeatedly crossing over the signal line. To limit portfolio volatility, traders that use the MACD typically stay away from trading or close positions.

According to the prevalent belief, utilizing a divergence signal as a predictive tool or leading indicator is a general method of using the MACD histogram. When looking back, a divergence trade may not have been entirely as accurate as it seems since preliminary data will only show successful divergence signals. A visual analysis of previous chart data will not uncover the failed divergences since they no longer seem to be a divergence in the chart data itself.

THE PRINCIPLE OF THE MACD INDICATOR

The MACD is based on a relatively simple principle. It computes the difference between an asset's 12 and 26 days exponential moving averages.   The 12-day EMA is the quicker of the two simple moving averages that comprise the MACD, while the 26-day EMA is the slower.

Both moving averages utilize the finishing prices of the period being monitored to calculate their values. A nine-day EMA of the MACD indicator is also shown on the MACD chart, and it serves as a prompt for buy and sells choices. When the MACD rises beyond its nine-day exponential moving average, it provides a bullish signal; when it travels underneath the nine-day EMA, it then goes ahead and prompts traders to take a short.

The MACD is also statistically represented by a histogram with beautiful color gradients and a visual depiction of the MACD's deviation from its nine-day EMA. When the MACD is beyond its nine-day EMA, the histogram is positive; it is harmful when under its nine-day EMA. If prices increase, the histogram expands as the pace of price movement increases and reduces as the rate of price movement slows. When prices are declining, the same reasoning applies.

An excellent illustration of a MACD histogram in operation is seen in the chart below:

Because it reacts to the pace of price movement, the MACD histogram is the primary explanation why many traders depend on it to assess momentum. However, many traders utilize MACD indicators to identify the intensity of a market move rather than the path of a trend.

DRAWBACKS ON THE MACD INDICATOR

Every indicator has its setbacks and limitations, and the MACD is not necessarily exempted. We can see here that:

-        The MACD indicator's main drawback is user dependency. The MACD, like many technical indicators, is made up of several elements that can be changed indefinitely; therefore, results will always vary.

-        While crossover is a lag indicator, the momentum divergence is not. Reading price action solely from the MACD may get traders to make early predictions of market reversal and then get stopped out, causing minor losses before the larger one. A trend may converge or diverge without reversing. A market may join for a few candlestick bars before recovering pace and continuing.

It is essential to always backtest the use of an indicator before testing it out in an actual bull-brawl arena to avoid broken noses and bleeding pockets.