You will learn the best settings for MACD indicator today, but we will start with the basics. 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.
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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.
Best settings for MACD indicator
The IQ Option platform has dozens of built-in indicators that help in chart analysis. Take a look at the MACD settings interface in the image below.
The vast majority of indicators have predefined settings that you can change. When you drop an indicator into a chart, the indicator has the default settings set. For MACD we have Fast period, Slow period and Signal line settings. The defaults are written as MACD(12,26,9), where Fast period = 12, Slow period = 26 and Signal line = 9.
These default settings that IQ Option suggests for MACD are also common on many other technical analysis platforms. If a tool is used by the majority in a particular way, it makes sense to use the same way as well. We, therefore, consider these to be the best settings for MACD indicator.
What is the best MACD setting for day trading?
Day trading and scalping, which is a special case of day trading, do not require changes to MACD settings.
However, there is a group of traders who, for fast trading, prefer parameters which they consider to be the best settings for MACD indicator. These settings are MACD(5,35,5). The indicator reacts faster to price changes with these settings. A comparison of these two popular settings can be seen below on the EURUSD chart.
Understanding how the MACD indicator works
The MACD indicator is all about the 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 moves above the zero line, this is a 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.
Is MACD reliable?
MACD is a commonly used indicator. For good reason. It gives numerous signals when the histogram crosses the central line, when the signal line crosses the MACD line or when there are divergences. Based on selected signals it is easy to define simple rules for a MACD-based strategy.
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.
Good Luck!