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MACD indicator overview
The Moving Average Convergence Divergence (MACD) is a trend following and momentum indicator. It's one of the simplest and most effective indicators to use when trying to identify trends and possible trade entry points. This indicator has two moving averages that oscillate above and below a center zero line.
This guide will teach you how to set up the MACD indicator and use it to trade on IQ Option.
Setting up the MACD indicator on IQ Option
After logging into you IQ Option trading account, set up your candle sticks chart. Next, click on the indicators feature and select Momentum. Finally, select MACD. This indicator comes with the settings of 12, 26 and 9. Leave them as they are.
Understanding how the MACD indicator works
The MACD indicator is all about convergence and divergence of the two moving average lines. The EMA12 line reacts to price changes faster than the EMA26 line.
The convergence or divergence of these two moving averages is a signal that a trend is developing (or not).
When the EMA12 crosses above the EMA26, and move above the zero line, this is positive divergence. As the gap between the two lines increases, the stronger the upward price momentum becomes. At this point, you should enter a buy position.
When the EMA12 crosses below the EMA26 and moves below the zero line, a negative divergence is occurring. As the gap between both MAs increases, so does the downward momentum of the prices. At this point, you should enter a sell position.
MACD divergence
MACD divergence occurs when the two moving average lines seem to fall while the prices are rising and vise versa. This phenomenon signals a potential trend reversal. Trading MACD divergences isn't advisable. It's best to wait until the MACD indicator signals a clear trend.
The MACD indicator is one of the best tools you can use to identify trend reversal signals. Now that you've learned how to set it up and use it, try it out on your IQ Option practice account today.