Like many of the other great tools contained in the dt Pro platform, the MACD indicator is another way to give any trader a critical edge in the futures markets. MACD stands for Moving Average Convergence Divergence. It is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD uses the difference between short-term and long-term price trends to anticipate future movements. This indicator is derived by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA, which is already conveniently calculated for you. The MACD lets you enjoy the result of two indicators at once: “trend following” and “momentum”. It is a lagging indicator, which means it trails the current price action. In other words, the move in price will occur before the indicator has an opportunity to signal the action needed to be taken.
Why Use the MACD indicator?
Traders use this indicator to check the strength of a specific trend in the market. As one could probably guess, this benefits a trader by giving them extra confidence. The two lines with this indicator are the two moving averages (MA). The moving averages allow you to monitor the trends in the specific market. Now we must understand what the “CD” means from the MACD title. Convergence confirms price movement in a situation where two indicators come together at a specific point. Divergence is when this situation of two indicators is unsuccessful by not confirming the price movement. When the two moving averages come together for a certain amount of time, this will make the oscillator hover along the 0 line. When the two moving averages move farther away from each other, it causes the bars on the MACD to get larger.
The MACD has 3 total components.
- MACD line
- “Signal Line”
**Please note that the colors for each line can be changed in settings, but for reference to this MACD outline let’s assume all are using the default dt Pro settings.**
The actual MACD line is the blue line. The “signal line”, which is a nine-day EMA of the MACD and the pink line on the chart, is then plotted on top of the MACD. This functions as a trigger for buy and sell signals. When the blue MACD line crosses above the pink signal line, it is a bullish sign and signals a long position. When the blue MACD line falls below the pink signal line, it is a bearish sign and signals a short position. The bars along the 0 line make up the histogram. The histogram measures the momentum in the specific market. The longer the length in the bars denotes the more momentum there is going to be in that direction. As a result, the small histogram bars show convergence and the large histogram bars show divergence. Histogram bars above the 0 line are usually a buy, while bars below the 0 line are a sell. Of course, the longer the bars the higher probability this statement is true.
This indicator is more of a confirmation tool to help traders make analyzed decisions when considering to buy or sell. The MACD should not be used as someone’s only tool to execute trades, but rather an additional resource to their entire trading platform. I currently use the MACD in my own dt Pro trading platform when analyzing different markets and reviewing clients’ open positions. If you would like to learn more about this specific indicator or the dt Pro platform, I would be happy to further discuss them with you.