MACD is also another lagging indicator. It is called Moving Average Convergence/ Divergence. It is a trend following indicator. It uses two moving averages EMA 12 and EMA 26 and MACD is calculated by subtracting EMA 26 from EMA 12.
MACD also acts as a momentum oscillator thus it is a very helpful indicator to know about trends as well as momentum.
Here the blue line is MACD( fast-moving average value) and the orange line is the signal line. Green bars and red bars are histograms and a straight line is line ‘0’. When the MACD line is above line ‘0’ then we can consider it to be an uptrend and sentiment are bullish. When MACD crosses below line ‘0’ then we consider it to be a downtrend and sentiment is bearish.
Now we will learn how to use the MACD line for exit and entry positions.
First of all, we should find trends for the stock or index in the middle time frame chart(daily chart).
So in the daily chart, we should find the current trend.
Here we can see currently the trend is downward. Now, let's use a 1h time frame chart to find buying and selling points.
Here at pint 1 MACD line crosses above the signal line which means buying signal and at pint 2 MACD crosses below the signal line which means selling signal.
Here point 1 is also called bullish crossover as the MACD line crosses above the signal line. and point 2 is called bearish crossover as the MACD line crosses below the signal line.
In order to make early exist we can exist when the histogram is of light color.
NOTE: In uptrend never do short trending when MACD is above the line ‘0’.