Moving Average Convergence-Divergence (MACD)

23MACD3050913Gerald Appel invented the MACD during the late 1970s and it is now regarded as one of the most effective although simplest momentum indicators on the market. MACD operates by converting two trend-following moving average indicators into a momentum oscillator by subtracting the longer-period one from its shorter-period counterpart.

By doing so, the MACD is capable of performing well during both trend following and momentum trading conditions. MACD oscillates about the zero line about which the moving averages diverge, converge and cross. You will discover that you can identify high quality trading opportunities for opening spread bets by detecting signal-line crossovers, divergences and center-line crossovers. However, the MACD is not considered ideal for detecting oversold and overbought levels.


How the MACD Functions

You can calculate the MACD readings by deducting the 26 day EMA from the 12 day EMA. The signal line represents the 9-day EMA of MACD and the MACD reading is produced by subtracting the signal line from the MACD. These calculations normally use the closing prices of the moving averages. The histogram exhibits positive values when the MACD is above its 9-day EMA and negative when below.

The function of the MACD is mainly centered about the divergence and convergence of its two moving-averages. Convergence is registered when the moving averages advances towards each other whilst divergence exists when the moving averages progress apart. The shorter moving average (12-day) is fast and generates most of the MACD movements. The longer moving average (26-day) is slower and responds less quickly to the price change of the underlying assets of interest.

The MACD fluctuates below and above its centerline or zero line. You must understand that when crossovers occur that these events identify that the 12-day EMA has crossed either above or below the 26-day EMA. If the MACD posts positive readings then this indicates that the 12-day EMA has moved above the 26-day EMA. You should consider such a signal as a buying opportunity for long spread bets because bullish momentum is prevalent.

Alternatively, negative MACD readings indicate that the 12-day EMA has dropped below the 26-day EMA. Under such circumstances, you should consider activating short spread bets because downside bearish momentum is dominant.


Strategy Based on the MACD

Professional traders recommend that one of the optimum methods to learn how to trade the spread betting markets proficiently is to focus on one particular asset. You can achieve this objective by utilizing the following strategy, which is based on the MACD, because it focuses on the EUR/USD.

You will find that every security possesses its own special behavioral pattern. As such, if you have just commenced spread betting then you should opt to trade the EUR/USD until you attain more trading skill and knowledge. You will then be able to take advantage of a number of specific features that this asset offers, e.g. constantly high liquidity. You must also realize that nearly 80% of all transactions implemented on the Foreign Exchange market are based on the EUR/USD.

The euro is denoted as the base currency of this pair while the USD is known as the quote or counter. Consequently, if the EUR/USD is offered at 1.4000, then you can exchange $1.400 for one euro. If you can master how to predict the directional movements of EUR/USD with accuracy then you can attain a consistent stream of profits by opening spread bets based on this asset. For instance, if you forecast that the euro will decline in value against the US Dollar then you should evaluate the viability of implementing a short spread bet structured on the EUR/USD.

In addition, the EUR/USD is associated with high liquidity. This is an important feature as it ensures that you will always be able to implement spread bets based on this pair since other investors will be available to support your transactions. Consequently, experienced traders advise that you should obtain or design a spread betting strategy that will enable you to benefit from the many advantages of the EUR/USD currency pair.

If you are a beginner at spread betting, then utilizing a strategy based on the MACD and Parabolic SAR will assist you in accomplishing this task. You can implement this tool by utilizing the following steps:

1. Display the thirty minute trading chart based on the EUR/USD.

2. Activate the MACD technical indicator based on its default settings of 12, 26 and 9.

3. Activate the Parabolic SAR based on its standard parameters of 0.02 and 0.2.

J. Welles Wilder devised the Parabolic Stop and Reverse (SAR) as an indicator to detect potential price reversals in the directional movements of securities, such as indices, stocks, currencies and commodities.

You can then deploy this strategy to identify quality entries for spread bets as follows:


Bullish Trends

Confirm that price is about to enter a new bullish channel by verifying that the MACD lines have just changed from negative to positive.

Validate that the Parabolic SAR is also displaying a buy signal by posting a star symbol which must be located beneath the current price of the chosen asset.

The next diagram demonstrates these conditions.


Bearish Trends 

Confirm that price is about to enter a new bearish channel by validating that the MACD lines have just changed from positive to negative.

Verify that the Parabolic SAR is also displaying a sell signal by posting a star symbol which must be located above the current price of the chosen asset.

The next diagram demonstrates these conditions.


After you have detected a quality trading opportunity, you must then choose whether to implement a short or long spread bet depending on the results of your analysis. For instance, imagine that you have verified that the EUR/USD is presently advancing within a new bullish channel. Consequently, you should implement a long spread bet supported by a stop-loss order located beneath the MACD buy line.

In contrast, if you confirm that the EUR/USD is progressing within a new bearish trend, then you should activate a short spread bet. You can then minimize your risk exposure by locating a stop-loss order above the MACD sell line.


MACD Trading:


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