5 Reasons Why MACD is Best Indicator

Today, you’ll learn why MACD is best indicator or one of the best.

Including:

  • Leading Indicator
  • Momentum Indicator
  • Bullish Crossover
  • Easy to Screen
  • Can be used in day trading
  • Short Term Strategy

MACD, often regarded as the best indicator by professional traders, is also a leading and momentum indicator.

The leading indicator known for the bullish crossover is simple to screen online. After Screening, the results may be used for intraday or short-term trading.

Short-term trading opportunities preferred by most traders are often detected in advance by this indicator.

When the MACD indicator gives a bullish signal, the stock price often moves higher.

However, the size of the move can be predicted through histograms.

The histogram is often used as the momentum indicator. Below, more discussion will be given to explain the tool’s usefulness.

When used properly, it is a tool that may help traders extract profits from the stock market.

The stock market is full of opportunities, and a trader’s job is to find them.

A trader having understood the usage of MACD can make money in the stock market with confidence.

What is the MACD indicator?

According to Investopedia, Moving Average Convergence Divergence (MACD) is a trend following indicator. (source)

MACD often used by traders may give signals about the trend.

The trend can be bullish or bearish, depending upon how MACD crosses into the signal line.

The cross can be from below, signifying a bullish trend or above for a bearish signal.

Only bullish trends are discussed in this post because the recommended trades are always long entries.

Buy entries are often suggested because shorting stocks is not considered safe.

It is not safe because the losses are unlimited, and the MACD indicator is effective when used in an uptrend market.

The indicator is calculated between two exponential moving averages(EMAs) with the default periods.

Default periods are 12-day and 26-day EMA representing the fast and slow line.

The difference between the two is often plotted into histograms on stock charts.

Histograms can be negative or positive, creating exit signals depending upon the trade.

The trade can be long or short, and positive histograms may detect momentum or weakness when there are still open long orders.

Leading Indicator

MACD is considered a leading indicator because it often appears first before the price move.

The price move can be short, long or non at all.

There is no guarantee that the price will change just because there is a buy signal from the MACD indicator.

However, the indicator may help traders find good trading entries every day.

Every day, a trader can scan the stock market and look for opportunities even without using expensive software.

In the strategy section below, scanning stocks is simple and free.

Free tools are now available online, for example, investing.com stock screener.

Screening MACD bullish crossover is now available on the web without traders’ cost.

Traders can anticipate a bullish move with MACD before it actually happens.

MACD can help detect the probability of successful trades in the stock market.

The probability of successful trades can be predicted through the histograms in the indicator.

For example, when the histogram is large and then followed by a decrease in size, it is often considered a reversal signal.

However, the signal is not taken directly because the trader needs to wait for the momentum signal.

Momentum Indicator

Momentum signal occurs when the MACD line crosses into the indicator’s signal line.

The cross is also described as the cross of fast and slow exponential moving averages.

Both the fast and slow EMAs are lagging momentum indicators.

However, because of the histogram, it is a high probability that the signal is strong.

The signal is strong because the cross of 2 EMAs happened after a decreasing histogram.

Further, the decreasing histograms are the first hints that the short-term trend is about to reverse.

The reverse is also true when exiting a stock trades.

Trade exits are easy to spot because of a decreasing histogram.

Histograms are powerful momentum measures; once understood, the trader can exit a trade with minimal losses.

Large losses can be avoided because there are early signals to sell the stock.

The signal to sell the stock is one of the powerful traits of the MACD indicator.

This indicator is complete, and traders can use it alone or use RSI to enhance further the signals coming from it.

The signals were probably not studied properly, resulting in too much misinformation about the indicator online.

Often on the web, only MACD crosses are considered a buy and sell signal on most websites and forums.

These websites promote incomplete information and result in more traders losing a lot of money.

They are losing because they are waiting for a cross that may or may not happen shortly.

Although the the trade has already gone against them.

Easy to Screen

How to screen these stocks without a paid tool or software?

Investing.com offers a free tool for traders using MACD indicator.

Just go to the stock screener page, select technical indicators, and then set the screener.

The screener is set from -0.15 up to 0.15 to find stocks with recent MACD crosses or just about to cross.

These stocks are good for bullish trading set ups.

The set-ups can be scalping or short term trades.

For scalpers, there is a need to use other indicators for exits.

However, short-term traders can use the histogram to exit their positions at the right time.

The histogram may help detect the slowing down of the price when traders are still holding their positions.

Positions can be taken with the use of this stock screener. However, it is important to select the best stocks among the results.

The best stocks are usually stocks that are near their bullish MACD crossovers.

Short Term Strategy Example

Buy:

  • Buy before or at the bullish MACD crossover.
  • A negative histogram must be decreasing in size
  • 10EMA must be below the 25 EMA

Sell:

  • Sell after the positive histograms decline two times.
  • Or sell when the price closes above both 10 and 25 EMAs.

In our previous post, titled ” 3 important moving averages”, the buy signal happens when the 5 days EMA breaks both 10 and 25 EMAs.

However, this EMA’s is susceptible to gaming by the large institutions.

Large institutions can sell at that moment because they know liquidity will come in at that price level.

But when that level is really bullish, the stock will still go up despite stock liquidations of large buyers.

To detect large buyers’ selloffs, an informed trader usually watches what happens to MACD histograms after the break of the two EMAs above.

However, new traders will not do this because they often wait for a bearish crossover.

This waiting period creates liquidity for big sellers.

Liquidity is important to them, and new traders will always lose money without knowing why it happened.

Another variation of this strategy is to wait for a pull-back after the break of the 10 and 25 EMA’s.

This is a classic example of stop hunting and the price will continue moving up.

Stop hunting happens all the time in the stock market.

The stock market is full of sharks, waiting for new traders to take their trades.

They usually take their trades at the break of EMAs or moving averages because that is how they were taught.