If you’ve been around the trading block a few times, I bet you’ve been trading with the MACD indicator. I also bet you have a copy of the MACD sitting at the bottom of your favorite chart. Am I right?
If yes, keep reading. If no, get a MACD indicator on your chart, and then keep reading. It’s freely available from just about every charting platform.
Today, the Forex tip is all about MACD, and one simple thing you can do right away to improve your trading with the MACD indicator, no matter what market you like.
What is MACD exactly?
MACD is Moving Average Convergence Divergence. It would be easy to assume this is a picture of 2 moving averages crossing, but that would be wrong! The MACD Line itself is a moving average that keeps track of the difference between 2 moving averages. That sounds weird, but stay with me for a minute.
The MACD keeps track of the average difference between a fast line and a slow line.
It doesn’t matter if the market is trending or ranging. What matters is whether the current market condition is stable or unstable. That is, the current market condition, be it a trend or a range, is either stable and likely to continue or unstable and likely to change what it’s doing.
I designed an entire trading strategy with the MACD (see below). In this post I want to show you one important MACD pattern that will make you smarter and change the way you look at your charts.
I call it a “Hopper” when the MACD Line crosses zero.
When that Hopper happens, change is upon us. If you are waiting for a point of entry, get your trade on when the MACD Line “hops” over the zero level. This shows you something new is starting. It’s also a great way to know you should exit a trade that isn’t working out. If MACD crosses zero, it means whatever the market was doing is now done, and it’s time to expect new market behavior.
In the example above, the MACD hopping over zero is demonstrating a point in time when I expect the previous range behavior to end and a new swing lower to begin.
Using your new strategy
Next time you see MACD hopping over zero think about getting in or getting out of your trade, because market conditions are changing. Happy charting with that magical MACD! Once you see it, you can’t unsee it.