MACD Indicator Trading Strategy

A positional trading strategy using MACD (with example) →

Hey there 👋🏼

In today’s edition, we’ll talk about an indicator that is created by combining 2 types of moving averages - the MACD.

Read on to learn how the indicator is constructed & how it can be used for an effective positional trading strategy.

What is MACD?

Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a stock’s price. 

The ‘MACD line’ is the difference between a stock’s 26-day and 12-day exponential moving averages (EMA). A 9-period EMA of the MACD line is also plotted, known as the ‘signal line’. It can be interpreted as follows:

  • A buy signal is generated when the MACD line crosses above the signal line.

  • A sell signal is generated when the MACD line crosses below the signal line.

Using MACD for Positional Trading

Combining the MACD with RSI and a 20-period EMA creates a good positional trading strategy, guided by the following rules ⬇️

Entering a Trade

An entry is triggered when the following conditions are met on a weekly or monthly timeframe:

> The price should be above the 20-period EMA, and the EMA should preferably be acting as a support

> A bullish MACD crossover should be seen

> The RSI should be crossing over/above 50

Booking Profits

Conversely, a position can be exited when the following conditions are seen:

> The price should be below the 20-period EMA, and the EMA should preferably be acting as a resistance

> A bearish MACD crossover should be seen

> The RSI should be crossing under/below 50

It’s prudent to look for bullish/bearish candlestick patterns as a confirmation along with the above signals before entering/exiting a trade.

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Example - Positional Trade in M&M

You can see how in the following chart, the price is above the 20-period EMA, a bullish MACD crossover is seen (highlighted in orange), and the RSI has crossed above 50 (pointed with purple arrow).

A bullish engulfing pattern forming after a few consolidating doji candles (highlighted in blue) confirms an entry for a fresh uptrend ⬇️

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Happy learning,
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