How to use Macd indicator with 12 key takeaways

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Start to Technical Indicators

Hello, Guys Welcome to our first article(Macd indicator) on Technical Indicators. Before we start, don’t forget to revise what we learned in the previous article of Candlesticks.

Hammer, hanging man, inverted hammer, and Shooting star candle give you indications of Top and Bottom in stock.

Spinning Top, Doji candle tells you indecisiveness in stock or Where A Bearish/ bullish trend comes to an end.

MARUBOZU candle tells you whether a continuation of fresh Rally is in stock either Bullish or Bearish.

Now let’s study one very good indicator which will not just help you identify the right trend in the market but will help you understand Top and bottom and good gain in the short term. Let’s do it.

Meaning of word Macd indicator?

Meaning-of-word-MACD-Indicator

In simple words, MACD means Moving Average Convergence and Divergence. Yes, it’s very simple, but all it needs is practice. It will help you identify the Turning point ( trend reversals ) in the market , will increase your winning rate in trades.

Why MACD indicator is necessary ??

Before we understand what MACD is and how it works, first understand why it’s necessary. See below picture,

Why-MACD-is-necessary-1

This is the daily chart of Relaxo without any indictors. You can see the trend in Relaxo, but are you able to identity when it’s going to reverse? Probably not because it’s just a chart of candles. Now when you add the MACD indicator, you will be able to identify the trend direction and trend reversals properly, trend strength, entry and exit points as well.

How to add MACD indicator in chart ?

The process is very simple, we will see it in Zerodha and Upstox both. You can open demat account using our link for free cash call and free stock portfolio review* do-follow

First in Zerodha, MACD indicator

see below picture.

zerodha

Step 1 = Click on +fx button which will open up column which has all indicators.

Step 2 = Type MACD , see the below Picture

upstock-1

Step 3= once you see the name MACD , click on that name then it will open up like this ( see below picture )

It will show a fast and slow MA period, signal period, etc. I advise not to change the number and click on the DONE button.

Now in UPSTOX, MACD indicator

same process see the below steps.

Step 1=

Click on charts and then click on +fx button. It will open up a column which has all technical indicators.

Step 2 = search MACD and click on macd indicator once it’s open, it will be added.

MACD-3

Now the question will be in your mind: what is the Signal line, what is Fast and Slow MA. Let’s see it one by one.,

Lets understand basics of MACD ?

Before we discuss what MACD consists of , please see the below picture.

MACD line (black line) = Subtraction of 26 days Moving Average Value from 12-day Moving average Value.

Signal line = 9 days Moving average Value

Histogram = Rectangular Bar graph following the horizontal line in the middle.

Zero line = Central Horizontal line. Now let’s Understand  How MACD WORKS ?

This is the same chart which I showed you before, but now the MACD indicator is applied.

Whenever the MACD line crosses over the signal line, it indicates there is a Trend reversal in stock from Bullish to bearish. Now, from the 1st crossover to the 2nd crossover, you can see stock went from 425 to near 350, which is almost 75 points, which means 15-17% downside.

Now check the second crossover where the MACD line is coming up over the signal line, which indicate stock is going from Bearish trend to Bullish trend. From 350 price stocks again went up to 400. Which is 50 point movements in stock, which is 14% point movement before the 3rd crossover happened.

Now you know two concepts,

First, with the help of MACD, it gave you 15-17% movement on the downside, and again, it gave 15% movement in the Upside. That’s what I was saying initially, as simple as that to increase your accuracy.

First, when the Signal line comes up over the MACD line by crossing it over, it indicates a Bullish to Bearish trend. And vice versa when the opposite happens.

But what’s the use of zero line and histogram ? Let’s see it as well.

Histogram means a rectangle bar graph which indicate nothing but the difference between two lines. More size of rectangular bar then more will be the difference. So when bar size starts decreasing, it means from tall to short, it indicates a crossover about happening.

When the 1st crossover happened, see the histogram. You will see Green candles are going down, red candles are increasing, and then we saw a crossover which tells you Bears are getting hold of Bulls.

Exactly opposite in the 2nd crossover, green candles are increasing before the crossover, which tells you Bulls are coming back strongly over bears.

Now, as long as both lines are moving on the upside of the zero line, it will indicate strength on the stock. Crossover happening below the zero line is comparatively weaker than those which are happening below zero line.

More examples on MACD analysis

First Example ,

This is the 15 min chart of Nifty50 , you can see how trend followed by MACD

1st to 2nd Crossover = Nifty50 went from 11275 to the HIGH of 11375, and then MACD gave a bearish signal near 11325

2nd to 3rd point = if you look closely, there is no crossover on the 3rd point, so the bearish trend continues. You can get it confirmed when you look at the histogram. There is no bar on the Upside of Zero line.

2nd point to the 4th crossover = from 11325 to new low 11250, and MACD gave a BULLISH signal at 11300.

4th point to 5th point = from 11300 to a new high of 11350 and again came back to 11300 where we got a further bearish signal.

So in each crossover there is at least 50-60 point movements in NiFTy50. Enough for you to understand which trend is going on.

 Second example,

1st point to 2nd point = Here not just HDFC bank but the entire market made a fall due to the CORONA news, but see the MACD signal before the HDFC bank slide below 1200 and then till the next crossover MACD was bearish on-trend and buying signal near 850.

2nd point to 3rd point = As I said before, crossover below the zero line does not necessarily represent a strong reverse signal, and in this case see the MACD indicator. It’s a mirror image of a previous trend when the stock went from 1200 to 800, but in this case, it went up only from 850 to 900 making high near 1000. The reason for less movement is the crossover below the zero line.

What we learned so far in MACD Indicator, Key Takeaway

1.            MACD is not the lagging indicator but the leading indicator which follows current price action of stocks

2.            MACD means Moving average convergence and Divergence

3.            Convergence when Trend is flowing as per MACD indication, but Divergence when stock goes opposite to what MACD is implying., Which suggests stock will reverse its trend soon.

4.            MACD consists of the Signal line, the MACD line, the Zero line and the Histogram.

5.            MACD line = 12 points, Moving Average – 26 points Moving average

Signal line = 9 points Moving average

6.            Zero line is the middle horizontal line and the Histogram is a Rectangular Bar graph which indicates a difference between the Signal line and the MACD line.

7.            MACD line goes up by crossover over the signal line. This means a Bullish trend ahead as more buyers are coming.

When the Signal line goes up by crossover over the MACD line, then a Bearish trend starts as More sellers  are getting active.

8.            If crossover happens above the zero line, then more strength. If it happens below the zero line, it will be weak compared to the previous one but strong enough to reverse the trend.

9.            Frequent crossover implies there is no strength in the trend, and it’s just a consolidation phase

10.          One can change Moving average numbers and use others, but we don’t get into calculation as it’s proven scientifically what we have in our Demat account. (12,26,9)

11.          Make sure you pair MACD with other indicators for more accurate results. Like when Hammer appear along with the crossover in MACD, then you can check the volume of the hammer candle and get double confirmation of trend reversal.

12. More duration of the chart , then more accurate will be the indicator ( same applies to MACD ).

You can see our articles

Quick to know about basics of share market for beginners

Top 3 charts in stock market? and why candlestick is best ?

Learn Marubozu candle pattern in 3 simple steps

What is Spinning top candle

Doji candle & 4 types of Doji

What is Pinbar, Hammer, Inverted Hammer, Hanging man & shooting star

Follow weekly Analysis 

Follow IPO Analysis



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