How To Trade With MACD Indicator (MACD Trading Strategy) – Part 1 πŸ”₯πŸ”₯
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How To Trade With MACD Indicator (MACD Trading Strategy) – Part 1 πŸ”₯πŸ”₯


– [Instructor]
Welcome to the video on How To Trade
With MACD Indicator. In this three part series, I’ll
be showing you applications of MACD across different
time frames and instruments. Concepts discussed
here can be applied to any MACD Trading Strategy
you currently practice. After this part, we will
discuss about MACD Indicator and its application
in short-term trading, positional trading,
and intraday trading. So let’s get started. Before we get started,
let me take 30 seconds to explain how MACD Indicator
and Signal Line is calculated. Now, when you look at
the MACD Indicator chart, the red line that you
see is the MACD Indicator and the blue line that you
see is the Signal Line. When you’re trading
MACD Indicator, you have three essential
elements on the chart. Number one, MACD Indicator,
number two, Signal Line, and number three, the Histogram. I haven’t plotted
the Histogram here, but it will show up
in subsequent charts. MACD Indicator is calculated by subtracting 26 period
exponential moving average from 12 period exponential
moving average. Signal Line is then calculated by taking a nine period
exponential moving average of the MACD Indicator. And the Histogram that
you don’t see here, is calculated by subtracting
the MACD and the Signal Line. Now do remember that MACD is a trend-following
momentum indicator and it represents
the relationship of
two moving averages. Therefore, like all other
trend-following indicators, MACD Indicator is prone
to whipsaws as well. One more important aspect to
note is that MACD Indicator is lagging in nature
as moving averages are used in its construction. The key is to identify the
right market conditions and then to buy and short
based on what MACD Indicator, Signal Line, Histogram
and price action suggest. You cannot randomly
apply this indicator in order to execute trades. Always remember the
importance of underlying trend and overall relevance
of current price move. Now MACD Indicator
is readily available across all trading platforms and you can also check the same at tradingview.com
and investing.com, which are free for
traders to use. Let us now come to
understanding the Histogram as this will be important
in subsequent parts. Histogram is the difference
between MACD and Signal Line and it is essentially an
indicator of indicator. This means it is derived
out of MACD and Signal Line, which in itself are indicators. Whenever the Histogram
is above the zero line, this represents
positive momentum and whenever Histogram
is below the zero line, this represents
negative momentum. Since Histogram
represents difference between MACD and Signal Line, it can often signal
trend change early. For example, look
at this region here. MACD Line crosses
the Signal Line at this particular point, but
Histogram had started rising well before this point. Do remember that while
Histogram can pick up momentum and trend change early, it is prone to more whipsaws
when compared with MACD and Signal Line crossover. I will be explaining
how to use Histogram, MACD and Signal Line together
in part two and part three. Let us now come to
MACD and Signal Line. When used on a daily
time frame chart, both MACD Indicator
and Signal Line are excellent
trend-following indicators. If you analyze charts
in your database, you’d know how well
these indicators work to identify direction and
momentum of underlying trend. What I’ve found is that
instead of using these as timing indicators, if you use this as trend
reference indicators, your result would
increase a great deal. This is mainly because MACD and Signal Line
cross quite often, and if you use this as
entry and exit tool, you would get fair
share of whipsaws. This in turn will lower
your overall profitability. Now, as a rule of thumb,
focus on long trades in only those stocks
where MACD and Signal Line is above the zero line, and focus on short trades
in only those stocks where both are
below the zero line. When it comes to crossovers
between MACD and Signal Line, I will cover some specific rules
in part two and part three, as these vary depending
on underlying time frame. For example, on daily
time frame chart, crossovers still work very well, but on a five minute
chart, conventional way of using MACD and Signal
Line does not work that well. This means we need
a different approach for trading MACD Indicator
on a daily time frame chart and a different
approach when it comes to shorter time frame charts. In this chart, I will
prefer short-selling in all these regions
where MACD Indicator and Signal Line is clearly
below the zero line. On the flip side, I
will prefer to go long when MACD Indicator and Signal
Line is above the zero line. I hope this particular
aspect is clear. Let me now come to the
importance of zero line in MACD Indicator. More often than not, while
trading with MACD Indicator, traders tend to focus on
Signal Line, Histogram, and MACD Indicator. Focus also remains on
divergence and convergence within the indicator. In my opinion though, the most important
element in MACD Indicator is the zero line. The main reason being
that it is the zero line that gives reference to how
to look at MACD Indicator. For example, if you find MACD and Signal Line
above the zero line, you would know that trend
bias is up for price. Similarly, if MACD and Signal
Line is below the zero line, you would know that you need
to look for short trades, as trend is down. Do remember that your
first point of analysis has to be to look at
MACD and Signal Line, with respect to the
zero line on the chart. Everything else comes later. I can assure you if you
simply start looking at zero line first, your way
to look at MACD Indicator would change forever. In this chart, I would be
looking for long trades in this region where
MACD and Signal Line are clearly above the zero line. Whereas short trades I would
be taking in this region where MACD and Signal Line are
clearly below the zero line. Let us now come to the section of how not to use MACD Indicator when it is above the zero line. Most beginners, when
introduced to MACD Indicator, tend to buy when MACD Line crosses the Signal
Line from below. And they tend to
short when MACD Line crosses the Signal
Line from above. This approach is not right and will lead to
losses and draw downs. Always remember that when
MACD Indicator and Signal Line is above the zero line,
you should be only looking to buy through MACD. Do not attempt to short-sell. When MACD and Signal
is above the zero line, it represents price
trend on the upside. Now, momentum may vary
depending on market cycle but this does not mean you
should go ahead and short-sell. Also remember that
divergences in MACD Indicator and price is more common
above the zero line and this gives trader a
sense of uptrend being over. If you look at historic charts, you would learn that
divergence above zero line works only 20 to 25% of
the time in a bull market, and hence avoid short-selling
based on divergence. In bear markets though, this
number jumps up to around 60% and that’s when you
should be looking into short-selling based
on MACD divergence. I will cover this
aspect in parts ahead, as this is out of scope
of this particular part. In this chart in front of you, every time MACD Line crosses
the Signal Line from above, it does not mean
that price will fall. It just means that
momentum has reduced and one needs to be careful. Look at all these instances here where divergence
is clearly visible and yet price continues
to move higher. In between, you do
see price retracing in this particular region, but this is just normal
corrective price action and not start of
a fresh downtrend. Do keep this aspect in mind. Let us now come to
an example where MACD and Signal Line is
below the zero line. Every time the MACD crosses
the Signal Line from below, you don’t have to
initiate a long trade. Again, this is not
the right approach and most beginners do this
on a consistent basis. Whenever MACD and Signal
Line is below the zero line, always think of short-selling and do not be tempted
to buy into the stock. The reason why buying
works in the short-term, is because countertrend
moves in downtrend are more momentum-oriented
and hence it gives an illusion of buy crossover working
in downtrend as well. Now your job as a trader is to identify high
probability setups, it is not to trade all the
signals available on the chart. Therefore, if you miss
some opportunities to buy or to short, then
be content with it. In the long run, this
won’t matter much. As with any other indicator, you have to look at price
structure, overall market trend, along with what MACD
and Signal Line suggests before taking a trade. Any MACD trading strategy
you experiment with should have all these
elements within it. This is the only
way you will create a complete trading strategy. Let us now come to time frame
selection for MACD Indicator. This chart that you see
is daily time frame chart and all example in
this part are mostly from daily time frame. Now in my experience,
if you are interested in short-term trading
or swing trading, then prefer daily
time frame chart only. This is by far the
best time frame you can implement
MACD Indicator upon. Now what I’ve found
is that MACD Indicator is really consistent
on daily time frame and whipsaws are far less
than what you will find on a lower time frame chart. Whenever you select
a time frame, you need to measure
effectiveness of MACD Indicator in terms of overall consistency. If MACD and Signal Line
crossover many a times, then you will find it
difficult to trade with MACD. Therefore, along with
instrument selection, time frame selection
again plays a vital role in trading this successfully. Let us now come to a
lower time frame chart. If you look at five
minute time frame chart, look at how many
times MACD moves below and above the zero line. Now, this is in a span
of four days only. Also, look at the number
of times you get MACD and Signal Line crossovers. Clearly, you cannot apply
standard buy and sell techniques using MACD Indicator on such
a short time frame charts. It is clear that on
shorter time frame chart, you need a more
structured approach while applying this indicator. Now, this is mainly
due to two reasons. Number one, trend
is more short-lived in such time frames,
and number two, since trend is short-lived,
momentum is more erratic. In the subsequent parts, I will be showing you
how to use this indicator on shorter time frame charts. Again, my main
focus is to help you identify high
probability setups only. If MACD Indicator is
something that appeals to you then start working on
two important aspects. Number one, which stocks
to select for trading, and number two, time frame
you are comfortable with. If you can narrow down
to these two elements, then you will be able to
trade with this indicator on a more consistent basis. This step, in my opinion, is not followed by
majority of beginners. Do keep this in mind. Let us now come to the
section of Stock Selection. If you think of
it, MACD on its own is not an ideal filter
on quality of trend. All it tells you is when you should be
attempting to buy into a stock and when you should be
short-selling the stock. By analyzing MACD, Signal
Line, and the zero line and by looking at price action, you can estimate what
may happen going ahead. This means you need
some other criteria to select the right
kind of stocks to trade. Now I’ve studies over
500 stocks in our market and the US markets, and
have found that those stocks that fundamentally do well
work best with MACD Indicator. Let me just show you
couple of conditions that can help you eliminate
90% of stocks in the market and this will make
your job a lot easier. All examples shown here are
taken from Screener Dot In. Now on Screener Dot In
website, I scan for stocks based on four main criteria. Number one, market
capitalization. Number two, average
return on capital employed over the last three years. Number three, promoter holding. And number four,
average return on equity over the last three years. Now, by using these criteria, you can limit the
stocks to focus upon to a list of about
100 to 100 stocks out of the 3000 odd stocks
that trade in our market. I focus on stocks
with market cap of rupees 5000 Crore or more with promoter holding
greater than 70%. Along with this, over the
last three year period, I want ROE and ROCE
to be greater than 5%. I have found that
historically such stocks have worked very well with
most MACD Trading Strategies and hence this is
what I focus upon. Now you will be
required to run a query on Screener Dot In
to get this data. In case you want the
specific query for same, then let me know in the
comment section below. One of the most
important aspects while trading MACD Indicator is to understand trend
and countertrend, in up move and in down move. This will help you be
with trend while it lasts. Now let us take
up up move first. When MACD and Signal Line
is in the bullish region, pay close attention to
kind of candles forming during the up move. You should be in a
position to identify clear wide-range bullish candles in order to ascertain that
buyers remain in control. Make sure that bearish candles
are not too wide in range and lack significant volumes. In a strong uptrend, bearish
candles are always limited in terms of overall range and this helps you classify
them as countertrend candles. One of the main ways to
judge if MACD divergence would work or not is
to assess the strength of bearish candles
in recent times. If you spot wide-range
bearish candles and a valid MACD
bearish divergence, then do pay attention
to that setup. Most of the times when
price is moving up, bearish candles will
be of limited range and such candles will help
you stay with the trend. And hence, it is very important to pay attention
to such candles. Now when it comes to downtrend, trend and countertrend candles tend to work little differently. When MACD and Signal Line
remain below the zero line, most of the bearish candles
will be wide in range and will have element
of high momentum. In a downtrend, when
countertrend moves happen, even bullish candles
will be wide in range and will have element
of high momentum. Now this is where countertrend
moves in downtrend is different from what
we saw in uptrend. In uptrend, countertrend
candles are not wide in range and do lack momentum. But in downtrend, even
countertrend candles are wide in range and have
element of high momentum. This is one of the main
reasons why staying into short-sell
position is difficult when you compare it with
holding long positions. This is because countertrend
candles give one an impression of trend being over and makes
a trader exit positions early. When you are short-selling
using MACD Indicator, you will have to train yourself to see wide-range
countertrend candles. This is the only
way you will remain in positions when you see
this playing out in real time. I hope this particular
point is clear. Along with MACD Indicator,
you can also combine volume to check trend and
countertrend candles. In order to increase
odds of success, make sure trend candles are
backed by strong volumes. This would in turn suggest
strong participation and commitment from traders
in the direction of trend. While checking for
countertrend candles, make sure volumes are
on the lower side. This would reaffirm less
commitment on the down side. Look at all the regions
marked on the chart, while price is moving up, volume has expanded and
while price moves lower, volume is clearly
on the lower side. As volume starts expanding
on the downside here, MACD and Signal crossover
eventually takes price lower. It’s important to
note that volume here is not a decision making tool, but a tool to
measure effectiveness of trend and
countertrend candles. We will be discussing
more about applications at a later stage. One of the most important
applications of MACD Indicator is to club it with
other indicators. One such combination is
combining MACD Indicator with Moving Averages and
Relative Strength Index, that is RSI. In this combination,
Moving Average is used as trend reference, RSI Indicator is used
as trend confirmation and MACD Indicator is
used for entry and exit. Now, this is a combination
along with other indicators that we will explore further
in part two and part three. As a trader, do not shy away from combining
indicators together. This is the only way
you will know what works and what does not work. Unless you are creative with
your charts, you won’t fail and unless you don’t
fail, you won’t learn. Don’t ever forget
this and be bold in trying whatever
comes to your mind. Just remember to keep
your position size small in the experiment phase as you should not
lose a lot of money while trying out
different combinations. I will be covering
combination of MACD Indicator with other indicators
along with how to apply this indicator
on various time frames. I will then be showing
you how you can use this in swing trading, short-term
trading, and intraday trading. If you want me to cover
any specific thing on MACD Indicator, then
leave me a comment below and I will take
this up in detail. Also, if there is
any doubt related to MACD Indicator Concept,
Histogram Concept, and about trend in general, then let me know in the
comment section below. I read and reply to each
comment that is posted and hence don’t hesitate
to ask any doubt you have, no matter how basic it is. So kindly consider
hitting the like button and sharing this video
if you find it useful. Thanks a lot for watching
this video, guys. Take care and be safe.

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