What on earth is the MAC-DEE (MACD) and how can I use it to make profitable trades?

Are you curious about trading? Whether you’re thinking about dabbling in it as a hobby or considering the plunge into full-time trading, you’re in the right place.

If you’ve done any reading on trading, you’ve likely come across the term ‘technical analysis’. This is a method where traders study price charts of stocks, forex pairs, commodities, or other securities to predict future price movements.

They use various technical indicators to do this. In this crash course, I’ll be writing weekly articles to teach you how to understand and use these indicators for your own trading ventures.

Today, we’ll dive into the Moving Average Convergence Divergence, or MACD (pronounced “mac-dee”). Over the next few weeks, we’ll also explore other indicators like RSI, Bollinger Bands, Aroon, and Ichimoku.

I’ve selected these indicators because they are not only popular and widely used but also straightforward to understand and implement. You can find all these indicators on the Velocity Trader platform, which is my platform of choice. Additionally, you can link your Velocity account to your Tradingview account to access all the indicators we’ll cover.

Let’s kick off our journey with the MACD.

Understanding the MACD

The MACD serves primarily as a trend indicator—it helps identify whether a security is in an uptrend or downtrend. But its real value lies in predicting when a current trend might end and a new one may begin, using something called divergences between the MACD and the price chart.

Breaking Down the MACD

Technical analysis, MACD

Here’s what makes up the MACD:

• The MACD Line: This is the blue line, calculated by subtracting the 26-day moving average from the 12-day moving average.
• The Signal Line: Shown in red, this is the 9-day moving average of the MACD line.
• The Histogram: These are the green bars, providing a visual representation of the difference between the MACD line and the signal line.

MACD in Action

MACD SPP technical analysis

Take a look at the chart of Spar Ltd (SPP) above. Notice how the MACD line rises and falls with the price of SPP. Now remember, the key to using the MACD is to watch for when it diverges from the price chart. These divergences, although not always correct, can often signal the end of a trend and the start of a new one. And this is important because this is the point when you may want to enter a trade.

Let’s take a closer look at the Spar chart and MACD to identify the divergence.

technical analysis, MACD SPP

Notice in the above picture how SPP continued to rise to the second vertical line.

Yet, if you look at the MACD, you will see how the MACD only continued to rise until the first vertical line. From that point onwards, it started to decline.

That is known as a divergence, when the price chart and the technical indicator diverges from each other. In other words, one goes up while the other goes down or vice versa.

In the world of technical analysis, that is a strong signal that the current trend, an uptrend in this instance, is about to end and a new trend is about to begin.

And lo and behold, SPP peaked, and the share price began to tank. So if you kept an eye on the MACD and noticed the divergence, you could have opened a short position on SPP very near the top of the trend. And as a result, your short trade would have been very profitable.

Again, I must remind you, this divergence isn’t correct 100% of the time. Sometimes it is wrong, and the stock continues its trend. Other times the share price doesn’t fall, but instead it enters a phase of consolidation and instead just trades in a sideways channel.

But as you can see, when it does get it right, it can be very profitable for you as a trader.

How to get started?

If you’re interested in trying out the MACD, you can easily do so with a Rand Swiss trading account. The platform includes the MACD indicator, and setting up an account is straightforward. Just complete a mandate, send your FICA documents, and deposit a minimum of R25,000. Our brokers are here to help you set up the platform and guide you through your first trades.

If you’re not sure where to find trade ideas, that’s where Pickpocket Trader can help you. Simply take up a 90 day trial with this service, together with your trading account and start testing these indicators on the trades!

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