Educational: MACD, What is it and how to use it 📊 Introduction
You might want to read more about the MACD indicator if you're seeking for a technical indicator that can assist you in spotting market trends and momentum. Moving average convergence/divergence, or MACD, is one of the most well-known and often applied technical analysis indicators. We will define the MACD indicator, describe its operation, and provide trading tips in this publication.
📊 What is the MACD?
The MACD indicator displays the relationship between two exponential moving averages (EMAs) of a security's price and is a trend-following momentum indicator. The 26-period EMA is subtracted from the 12-period EMA to calculate the MACD line. The MACD line is the output of the calculation.
The signal line, which is then drawn on top of the MACD line and can be used as a trigger for buy or sell signals, is a nine-day EMA of the MACD line. When the MACD line crosses above the signal line, traders may buy the asset; when it crosses below, they may sell—or short—the security.
The difference between the MACD line and the signal line is represented as a bar graph on the MACD indicator called the histogram. The histogram can inform traders of the strength of a directional move and forewarn them of a probable price reversal. It can also determine whether an asset is overbought or oversold.
The MACD indicator thus depends on three time parameters, namely the time constants of the three EMAs. The notation "MACD (a,b,c)" usually denotes the indicator where the MACD series is the difference of EMAs with characteristic times a and b, and the average series is an EMA of the MACD series with characteristic time c. These parameters are usually measured in days. The most commonly used values are 12, 26, and 9 days, that is, MACD (12,26,9).
📊 How does the MACD work?
The MACD indicator gauges how much two moving averages of various periods are convergent or divergent from one another. The price trend is revealed by the moving averages, a form of smoothing technique that eliminates noise and oscillations in the price data.
The majority of MACD changes are driven by the shorter (12-day) moving average due to its speed. The 26-day moving average is slower and less responsive to changes in the price of the underlying securities.
There is a strong momentum in that direction when the shorter moving average pulls away from the longer moving average (i.e., when there is a significant difference between the two). According on whether the movement is upward or downward, this indicates that there is an increase in either purchasing pressure or selling pressure.
There is a weak momentum in that direction when the shorter moving average drifts in the direction of the longer moving average (i.e., when there is a minor difference between them). This signals a lessening of buying or selling pressure, as well as a price consolidation or sideways movement.
📊 How to use the MACD
The MACD (Moving Average Convergence Divergence) indicator is designed to be used for several purposes in technical analysis. Its primary function is to identify potential trend reversals, confirm entry and exit points, and assess the strength of a trend. Here are the key applications of the MACD indicator:
🔹Trend Identification: The MACD indicator helps traders identify the direction of the underlying trend in a market. By comparing the MACD line (the difference between two moving averages) and the signal line (a smoothed moving average of the MACD line), traders can determine whether the trend is bullish or bearish. A positive MACD indicates a bullish trend, while a negative MACD suggests a bearish trend.
🔹Momentum Analysis: The MACD indicator provides insights into market momentum. When the MACD line and the signal line move farther apart, it indicates increasing momentum in the prevailing trend. Conversely, when the MACD lines converge or move closer together, it suggests a potential slowdown or loss of momentum. Traders can use this information to assess the strength of a trend and make informed decisions.
🔹Crossover Signals: The MACD indicator generates crossover signals when the MACD line crosses above or below the signal line. A bullish crossover occurs when the MACD line crosses above the signal line, indicating a potential buying opportunity. Conversely, a bearish crossover takes place when the MACD line crosses below the signal line, suggesting a potential selling opportunity. These crossover signals are commonly used to identify entry and exit points for trades.
🔹Divergence Detection: Divergences occur when the price of an asset moves in the opposite direction of the MACD indicator. Bullish divergences can be observed when the price makes lower lows while the MACD forms higher lows. Conversely, bearish divergences occur when the price achieves higher highs while the MACD forms lower highs. Divergences can be early indications of potential trend reversals and can help traders anticipate changes in market direction.
🔹Histogram Analysis: The MACD histogram represents the difference between the MACD line and the signal line, displayed as bars above or below a zero line. The histogram provides visual cues about the strength of a trend. When the histogram bars are above the zero line, it indicates bullish momentum, and when they are below the zero line, it suggests bearish momentum. Additionally, the shape and direction of the histogram bars can provide insights into potential trend reversals or market consolidations.
📊 How to access the MACD.
The MACD can be accessed for free by simply clicking on your indicators tab and seraching MACD where you will find Moving average convergence/divergence.
The MACD indicator is a useful tool, but to make well-rounded trading decisions, it should be utilized in conjunction with other technical indicators, price patterns, and fundamental analysis. To make the best use of the MACD indicator, traders need also take into account the individual market circumstances and periods they are trading in.
Eductional
The Two Types of Risk Management PlanHello traders,
1) Fixed Risk
Calculates position size for next trade as a percentage of account depend on how much risk you willing to take every time every trade you taking you need to use fixed risk for every trade like for example 1% risk per trade so in this type of risk management plan we should require 100 losing trades in a row to blowing out our account a lot of people just using this simple method and this is very easy and understandable.
2) Cutting the Risk :
In this method cutting the risk we just normally trade 1% risk per trade but if we lose that trade so we just cut the risk to half for example if i trade with 1% risk and i lose so now the next second trade which i am taking i will be using 0.5% risk in that trade if i lose then i will be just keep using the same risk 0.5% some traders are are keep reducing the risk size like they come all the way to to 0.25% maybe they work for it but in our scenario if we keep losing we will be not reducing more than 0.5% risk per trade and when win comes then after our winning trade we will be back to the normal risk which is 1% risk per trade and keep trading with 1% risk per trade so short summary is if we lose cut the risk to half if we when if we win back to the normal risk if we win again stay with same normal risk but if lose then reduce the risk to half.
The reason behind that is in the fixed risk you have 100 traders to blowing out your account means 100 chances but in cutting the risk now we just calculate if we lose 100 trades in a row like fixed risk we would not blow out our account,, let's say we take our first trade and we lose now we are in -1% then another trade we will be taking with 0.5% per trade risk so here is 0.5% × 100 trades = 50 means if we continue to lose in a row after 100 trades we will be facing -50 draw down, so cutting the risk to half after lose trade is the safest method who wants to play safe and more chances to survive in the market.
I wish you good luck and good trading.
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🤫 You don't need much to succeed in tradingAll you need is...
> Good habits, both mental and technical
> (relentless) hard work
> Consistency in process
> 100% focus when trading
