How to Use the MACD Indicator to Verify a Trend
Spotting the beginning of a trend is the dream of all traders. The reason is that there is nothing to be gained if you are not adept at spotting when a trend is about to begin.
Then, and only then, can you be sure that what you are seeing is something that you can potentially profit from.
Therefore, it is hardly any surprise that people are constantly on the hunt for new ways to identify when a trend is about to form. One thing that they may look at is how they can use the MACD indicator combined with an EMA crossover to spot a trend.
The EMA Crossover & the MACD
The MACD or “Moving Average Convergence / Divergence” indicator is a momentum oscillator used to trade trends. The crossover of the two lines gives trading signals similar to a moving average crossover system.
You can use the MACD signals in conjunction with two EMA lines that you compare against one another. Most of the time, these lines are set at 10 and 20 periods to make them easy to review. You just look for a time when the 10 EMA line crosses over the 20 EMA line to see when there is a bullish or bearish trend forming — and use the MACD indicator to verify the trend.
If the 10 line crosses over the 20 line in an upward direction, this is indicative of a bullish trend. If it crosses over in a downward direction, this is indicative of a bearish move.
Check out the chart below to find what you’re looking for:
You need to look for trends and trend reversals by looking for these MACD crossovers. They have been shown to be fairly accurate at spotting when different trends are forming, and this information may be highly useful to you as a reasonably active trader.
Thus, make sure you take the time to look at the EMA crossover and the MACD to see when a new trend may be forming. Finally, you might want to wait for a period or two after the MACD crossover to verify with the EMA crossover and ensure that you are truly seeing a new trend forming.
As with any indicator, fakeouts can happen. This is what a fakeout may look like:
There is always that question : is it a real signal or is it a fakeout and most of the traders are either missing the good signal or choosing the bad one.
So how to avoid being missled and be profitable ?
It is very simple – by implementing a good Risk management and keeping all your trades under the same R/R ratio .
Just as an example – let’s say you have 6 good trades and 4 bad ones , with R/R 1:2 ( so you risk to lose 1 to gain 2 ) you will end up by making 12 in profits and losing 4 – your end result is 8 in your favour . So if you took every single trade that system told you so, you are in a very nice profit.
Just a little bit of math and discipline tremendously increases your chances!
You can also test drive The Amazing Trader algo charting that can help you clear your views.
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