Mastering MACD: A Comprehensive Guide for Traders

In today’s episode, I’m going to walk you through how to use MACD in your trading to help you:

This is an indicator you can use whether you’re trading stocks, Forex, Futures, or cryptocurrency. It doesn’t matter because MACD is a well-respected indicator and is part of the universal language of the financial markets, which is technical analysis. So let’s go ahead and jump onto the charts.

Case Study: Using MACD in Real Trading

I’m going to use a case study here. This is a stock that I traded just yesterday. I locked up about $5,000 of profit on it, and MACD was a big contributor to being able to lock up that profit and, most importantly, not overstay my welcome. Overstaying your welcome—how many of you struggle with not knowing when to walk away each day? I’m going to give you some tips during this episode to help you with that problem. I’ll even give you some recommended readings so you can really dive in.

Understanding MACD

Now let’s look at the one-minute chart. As an active day trader, I’m using the one-minute and five-minute time frames for finding my entries and exits. If you’re trading a swing trading strategy or using different time frames, you can use the MACD on the time frame that’s relevant for you. It doesn’t really matter because it’s valid on all time frames.

MACD stands for Moving Average Convergence Divergence. What it measures is when moving averages are either diverging and moving apart or converging and moving together. In classic long-term investing, there are significant moving average crossovers that investors look at as indicating a very significant change in trend. For instance, if the price has been selling off for a long time and then starts to come back up, you may see a long-term chart where the price has been down here but has begun to turn around. You would notice the 200 moving average here, and then let’s say your 100 moving average crosses over right here. This is a moving average crossover. Moving average crossovers can be very significant for traders and investors because they signal a significant change in trend and are valid both on daily charts and short-term time frames.

The Basics of Moving Averages

To help you better understand how MACD works and why it’s so important, it’s helpful to first give you a foundation in moving averages. After all, MACD uses moving averages as part of its calculation. Let’s say, for instance, we have a stock or any other asset. It doesn’t matter. Let’s say the price is slowly starting to move up, pulls away, dips down a little, and then pushes higher. This is a traditional pullback pattern that I generally enjoy trading. But let’s say it starts to move up and then stalls out, with the price going sideways through this area. On our chart, we would see our moving averages moving right behind the price. When the price is moving up, your moving average will always be a little below because it is plotted based on the average price over the last X number of periods.

I use a nine-period moving average, meaning each dot is the average price over the last nine candles. If the price is moving up, the average isn’t way up here because you have to factor in that prices were lower back here, so it always trails slightly behind. I personally use exponential moving averages (EMAs) in my trading. An EMA is different from a simple moving average (SMA). An SMA is simple because it just takes the average price over the last candles, whereas an EMA weights the more recent price action more heavily. This means a nine-period SMA versus a nine-period EMA will look like this: the EMA will always be higher than the SMA because it moves faster when more recent price action is weighted more heavily.

Short-term vs Long-term Moving Averages

Generally, when the price is moving up quickly, short-term moving averages will move quickly, and longer moving averages, like the 20 EMA, will move slower. The 20 EMA moves slower because it takes the average price over the last 20 candles, going further back. Then you’d have an even slower moving average, like the 200 EMA. These popular indicators can form a ribbon, and when they’re all stacked above each other, we would be very bullish on a trade. However, if the price suddenly declines, you could have a moving average crossover, indicating a change in trend. The MACD helps us visualize this more clearly than just having the indicators plotted on your chart.

Plotting MACD on Your Chart

Looking at our one-minute chart again, you’ll notice I have MACD plotted at the bottom. This bottom section is the MACD. Traders often ask me about my MACD settings. I keep it extremely simple: my MACD settings are standard and default. I do not change them from the default setting that comes when you initially put MACD on your chart. Most platforms use the same settings, but I’ll double-click and show you the inputs to make sure you’re using the same settings. Our fast length is 12, our slow length is 26, and our signal length is 9, with the source being close. This is the standard MACD setting. Essentially, it’s using a fast length moving average of 12, a slow length of 26, and a signal length of 9. These settings work well on my chart and are the standard for MACD.

The reason you want to use the standard settings for MACD is that you want to see the same signals everyone else is seeing. If you start fiddling with and changing it, it will significantly alter the buy and sell signals, and you might be the only person in the world using those settings. Traffic signals work because everyone respects them and knows what a green, orange, and red light mean. But if you decide to use a magenta or blue light, you’ll be off on another planet because no one else is using that, and you’ll crash your car. Similarly, in trading, you’ll start losing money because you won’t get the obvious signals.

Using MACD for Better Trading Decisions

For example, I’ll copy this and paste it on here twice, then change it to a 9 and 20 with a signal length of 5. It looks similar but is different. Speed it up even more by changing it to a 3 or 26 or making it 52, and you’re significantly altering how it looks. It may not seem dramatic, but it’s the difference between getting the signal at the right time and at the same time as everyone else or being just off. You want to time the market with other people because the market moves based on traders’ beliefs about price direction. Seeing the same signals as other traders helps you anticipate moves up, resistance points, or moves down, helping you avoid false breakouts.

Beginner traders who don’t use MACD are more susceptible to falling into the traps of false breakouts. Let’s look at SGBX, a one-minute chart of a stock I traded yesterday. I made $5,000 on it, and it began at 9:00 a.m. with breaking news. Initially, I see the stock on my scanners, get an audio alert, and pull it up on the one-minute chart and level two. In the first few minutes, I’m not really looking at the MACD because the stock has been going sideways and then suddenly has news. I know the moving averages will spike up, which is what they always look like with breaking news. When the price starts to stall out, it rolls over a bit, comes down to the support of the nine moving average, and the moving averages begin to converge. This is especially noticeable when the price breaks down, dragging the nine moving average and MACD down, resulting in a MACD crossover. This crossover is a critical indicator for me. When I see this, I am no longer a buyer. As a beginner trader, you’ll find more accuracy if you only trade when the MACD is open. There are times when I will trade against the MACD position, but that’s because I have more experience. These are more advanced setups with lower probabilities of success, but when they work, they can work well. As a beginner, focus on setups with the highest probability of success.

Practical Example: Trading with MACD

Let’s watch what happens here. MACD is against the trade, so no trade here. Then, we get back in when the MACD crosses over. Sometimes, putting it right in front of you makes it hard to miss. I’ll do this occasionally and encourage beginner traders to do the same. We go sideways, then crossover at the open, leading to a strong move. We stay open, push higher, and get another crossover. Focus on trading the front side of the move and avoid overtrading when the MACD is against the position.

For example, BNF squeezes up without news, and the MACD is positive. We squeeze up, pull back, and the MACD is still open. Buy the dip because the MACD is in favor of the trade. We push higher, then get a significant dip, and the MACD starts to come in against the trade. We get a crossover, so stop trading. Focus on the beginning of the move, the first pullback, and the second pullback.

I don’t leave the MACD plotted on the chart like that; it’s just for your benefit. This is how I have MACD plotted on my chart. There are times I’ve changed the coloring to make it pop more, but the settings always stay the same. Don’t change the settings, or you’ll get different signals from everyone else.

Consistency with MACD

People using MACD will do better if they use it consistently. Indicators work when you follow them on every trade. Use MACD for a few weeks and see if it helps you avoid false breakouts and remember when to walk away. If it does, keep it on your chart.

I’ve been trading for a long time. When I first started, I used MACD, RSI, and stochastics but never figured out the right way to use them, so I dropped them. My charts were simple, just candlesticks, volume bars, and moving averages. During the bear market of 2022, I found MACD helped me avoid false breakouts, so I kept it on since then. It helps me avoid false breakouts.

If you want to know more about technical analysis, I’ll put a link in the description and pin it to the top of the comments. You can download my ultimate technical analysis guide, which includes chart patterns, indicators, and everything you need to know if you’re interested in trading the strategy I trade.

Learning When to Walk Away

When it comes to Learning When to Walk Away, “Quit: The Power of Knowing When to Walk Away” by Annie Duke helped me understand that the best traders trade longer when the market is hot and walk away when it’s cold. Daily goals are almost irrelevant for good traders. Focus on optimizing your efficiency as a trader. Trade more hours when you’re making money at a high rate per hour, and walk away when it’s not happening. Focus on maintaining discipline for consecutive days, not on making money every day. This is about focusing on the process; the profits are a byproduct.

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