Trading with the MACD MA Price Indicator For MT4
The MACD is both a trend indicator and an oscillator. The acronym stands for Moving Average Convergence Divergence and the MACD MA Price Indicator For MT4 appears at the bottom of the main chart.
It has two elements – a histogram (represented by the vertical, grey lines in the small window) and a red line following the ups and downs made by the histogram. An important aspect to consider here is the fact that the histogram is either positive or negative, meaning the zero level is crucial when trading with the MACD MA Price Indicator For MT4.
Understanding the MACD MA Price Indicator For MT4
The best way to use an indicator is to start with understanding its elements and what they stand for. In this case, the MACD MA Price Indicator For MT4 is a representation of the actions of three distinct Simple Moving Averages (SMA).
The indicator uses MA(26), MA(12) and MA(9) and interprets the way they behave. If you are familiar with the concept of perfect order, this is what the MACD MA Price Indicator For MT4 shows.
Explaining the Perfect Order Concept
The perfect order concept belongs to moving averages. The idea behind it is to plot multiple moving averages on the same chart and wait until they align in perfect order.
For example, you can put the MA(200), MA(100), MA(50) and MA(20) on the same chart. In a strong bullish trend, the MA(20) is above MA(50), which in turn is above MA(100). And, MA(100) sits above MA(200). When this happens, it is said that the market moves in perfect order. It shows strong trending conditions. Obviously, in a bearish trend the order changes, with all the moving averages appearing the MA(200).
So what does this have to do with the MACD MA Price Indicator For MT4? The answer comes from the histogram – it shows the perfect order between the three MAs the indicator uses.
More precisely, when the perfect order forms in a bullish trend, the MACD histogram becomes positive (i.e. crosses above the zero level). On the other hand, when the perfect order appears in a bearish trend, the histogram turns negative.
Check the chart above. It shows the three moving averages (26, 12 and 9) used by the MACD MA Price Indicator For MT4. Focus on when the perfect order forms for the first time. By checking the histogram, that moment coincides with the histogram turning positive or negative. It represents the main way to trade with the MACD, albeit other trading strategies exist.
How to Use the MACD MA Price Indicator For MT4
Below you can see the USDCAD pair. This is one of the main currency pairs part of the Forex dashboard, on the daily timeframe.
The vertical lines show the moment the perfect order begins. We note that this is when the histogram turns either positive or negative.
The idea is not to trade the daily chart but to acknowledge what kind of a market is. For instance, when the perfect order forms on the bullish side (i.e. the histogram is above zero), the thing to do is to go on the lower timeframes and trade on the long side until the histogram remains positive). Or, when the histogram turns negative due to the perfect order forming on the bearish side, it points to a bearish market. Therefore, just go on the lower timeframes (e.g. hourly or lower) and trade on the short side until the histogram turns positive.
Divergences with the MACD MA Price Indicator For MT4
Another way to use the MACD MA Price Indicator For MT4 is to look for divergences. Trading divergences is a strategy on its own, but traders also use it to filter the main way of trading with the indicator, as presented in the previous paragraphs.
Before anything, let’s define a divergence. Usually, the price and the oscillator move in similar directions. If the price forms two consecutive highs, the oscillator follows. Or, if the price makes a new lower low, the oscillator confirms it.
However, from time to time the oscillator fails to confirm the price’s move. It simply refuses to make a new high or a new low together with the price action in the main chart window. When this happens, it is said that a divergence forms – either bullish or bearish.
Because the oscillator typically considers multiple periods before plotting a value, traders stick with what the oscillator shows, not what the price indicates. Therefore, when the price makes two consecutive highs but the oscillator doesn’t confirm the second one, that’s a bearish divergence. If long, it is time to exit the trade. Aggressive traders go short on such a signal.
When the price makes two consecutive lows but the oscillator doesn’t confirm the second one, a bullish divergence forms. It is time to go long or to close the short positions already opened.
The oscillator, in this case, is the MACD histogram. It considers multiple periods (26, 12 and 9), therefore traders stick with what it shows.
Examples of Bullish and Bearish Divergences with the MACD MA Price Indicator For MT4
The USDCAD daily chart used so far in this article perfectly illustrates how to use divergences with the MACD MA Price Indicator For MT4. It helps in understanding the divergence alone and how to integrate with the main way of trading with this indicator.
The two blue lines on the chart reflect a bearish divergence. As the price makes two consecutive highs, the MACD histogram fails to confirm the second high. That is a bearish divergence and spells troubles for bulls.
Coupled with the main way of trading with the MACD MA Price Indicator For MT4, it indicates that traders should stop looking for long positions as the perfect order still indicates. Instead, traders wait for the perfect order in the opposite direction (bearish) as a confirmation of what the bearish divergence already pointed out earlier.