The MACD indicator is considered to be a momentum indicator. This indicator works best under trending conditions. Since it works best under trending conditions, this indicator is best used with longer time frames such as daily, weekly, and monthly. It will still work under shorter time frames such as hourly but may not be as effective. The shorter the time frame, the more chatter will typically occur which reduces the effectiveness of the MACD. This indicator is not very useful in determining overbought or oversold conditions.
The MACD uses 2 exponential moving averages for its signals. On the MT4 platform, when you setup the parameters of the MACD, add a level of zero. The MACD has positive and negative territories with no limit to how high or low it can go. The Main lines of the MACD show as vertical bars. The more positive or higher the bars, signals a stronger uptrend. The more negative or lower the bars, signals a stronger downtrend.
As the bars climb higher, the indication is momentum building. As the bars drop lower, the indication is momentum weakening. Just as we don’t want to get overly caught up on 1 candle, we don’t want to get too concerned with one bar on the MACD. This is where the signal line can be helpful. The signal line is a simple moving average of the 2 exponential moving averages and would be used like any moving average to see the overall momentum climbing or dropping.
Divergences can be very helpful in pointing out changes in trends. If a pair is establishing higher peaks, but the MACD peaks are going lower, beware of an end to the uptrend. If a pair is establishing lower dips, but the MACD dips are going higher, beware of an end to the downtrend.
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