How I Nailed Trading with the MACD Indicator (Step-by-Step Guide)

0:00[Music]

0:01in today's episode I'm going to walk you

0:03through how to use macd in your trading

0:06to help you number one avoid false

0:08breakouts number two focus on trading on

0:11the front side of the move and not

0:14overtrade the back side when the price

0:16action becomes congested this is an

0:19indicator you can use whether you're

0:20trading stocks Forex Futures

0:23cryptocurrency doesn't matter because

0:25macd is a well-respected indicator this

0:28is part of the universal language of the

0:31financial markets that is technical

0:33analysis so let's go ahead and jump onto

0:35the charts I'm going to use a case study

0:37here this is a stock that I traded uh

0:40just yesterday I locked up about $5,000

0:42of profit on it and macd was a big

0:45contributor to being able to to lock up

0:48that profit and most importantly not

0:50overstay my welcome overstaying your

0:53welcome how many of you struggle with

0:56not knowing when to walk away each day

0:59I'm going to give you some tips during

1:00this episode to help you with that

1:01problem I'll even give you some

1:02recommended readings so you can really

1:04dive in now let's look at the one minute

1:06chart as an active day trader I'm using

1:08the 1 minute and the 5 minute time

1:10frames for finding my entries and exits

1:12if you're trading a swing trading

1:14strategy or you're using different time

1:15frames then you can use the macd on the

1:18time frame that's relevant for you it

1:19doesn't really matter because it's valid

1:21on all time frames now Mac d stands for

1:24it's an acronym that stands for moving

1:27average convergence Divergence so what

1:29is it's measuring is when moving

1:31averages are either diverging and moving

1:34apart or when they're converging and

1:36moving together in classic long-term

1:39investing there are significant moving

1:42average crossovers that investors look

1:45at as uh indicating a very significant

1:48change in Trend so if the price for

1:50instance has been selling off for a long

1:52time and then starts to come back up

1:55what you may see is let's just say this

1:57is a long-term chart this is the under

2:00moving average which has been selling

2:01off like this the the price has been you

2:04know sort of down here like this but

2:06it's begun to turn around here what you

2:08would notice would be uh the 200 moving

2:11averages here and then let's just say

2:13your 100 100 moving average crosses over

2:16right here so this is a moving average

2:18crossover moving average crossovers can

2:20be very significant for uh for Traders

2:23and investors because it signals a

2:25significant change in Trend and it's

2:28valid uh both on uh daily charts but

2:31also on short-term time frames so I

2:34think to help you better understand how

2:36macd works and why it's so important

2:39it's helpful to First give you a

2:41foundation in moving averages because

2:44after all macd uh is taking moving

2:46averages as part of its calculation so

2:48let's say for instance we have um uh it

2:51could be a stock it could be anything

2:52doesn't matter it could be an indic uh

2:54let's just say the price is kind of

2:55slowly starting to move up and starts to

2:58pull away here before dipping down a

3:00little bit and then pushing a little bit

3:03higher so we would call this a

3:04traditional pullback pattern that

3:06generally I would enjoy trading

3:08something like this but let's say it

3:10starts to move up here and then it kind

3:11of stalls out and the price kind of goes

3:13sideways through this area let's just

3:15say for instance so the way this would

3:18look on our chart is we would see our

3:20moving averages moving right behind the

3:23price when the price is moving up your

3:26moving average is always going to be a

3:28little bit below because this is plotted

3:31based on the average price over the last

3:34X number of periods now this is a moving

3:37average that I use which is the nine

3:39period moving average so that means each

3:42one of these dots is the average price

3:45over the last nine Candles now if the

3:47price is moving up the average isn't way

3:49up here because you got to factor in the

3:51prices were lower back here so it always

3:53Trails slightly behind now I personally

3:56use exponential moving averages in my

3:58trading and exponential moving average

4:00is different from a simple moving

4:02average you have an SMA or an EMA s SMA

4:07is a simple moving average EMA is an

4:09exponential moving average a simple

4:11moving average is simple because it just

4:13takes the average price over these last

4:15candles whereas an exponential moving

4:17average takes the more recent price

4:20action and weights it more heavily and

4:23what that means is that a 9 SMA versus a

4:269 EMA will look like this this right

4:28here is going to be the em

4:31Ma and this is going to be the SMA so

4:36the SMA will always be lower than the

4:39EMA because it takes longer for the

4:42averages to move up when you're waiting

4:43more recent price action heavier then

4:46the price moves faster so what we look

4:49at generally when the price is moving up

4:51quickly you've got your short-term

4:52moving averages are going that are going

4:54to move quickly and then you've got

4:56longer moving averages like this the 20

4:58EMA

5:00they're going to move a little bit

5:02slower so the 20 EMA moves slower

5:04because it's taking the average price

5:05over the last 20 candles so it's going

5:07further back and then you'd have an

5:09indicator a moving average that's even

5:11lower than that for instance the 200

5:14EMA so these popular indicators can form

5:18this uh ribbon here in a sense and when

5:20they're all stacked above each other

5:22like this then this is a time that we

5:24would be very bullish on a trade however

5:27what can happen naturally is if the

5:28price suddenly Clines you could have a

5:31moving average crossover when you have a

5:33moving average crossover it's indicating

5:35a change in Trend and the macd is

5:37helping us visualize that in a way

5:39that's much more obvious than having it

5:41plotted on your chart with just the

5:43indicators alone so if we look at our

5:45one minute chart again here what you'll

5:47notice is that I have macd plotted at

5:50the bottom so this bottom section right

5:52here is the macd now I always get

5:55Traders asking me Ross what are your

5:57macd settings so I I make this extremely

6:00simple my macd settings are standard

6:04they are default I do not change them

6:07from the default setting that comes when

6:09you initially put macd on your chart now

6:12most platforms are going to put on the

6:13same settings but I'll double click this

6:15and show you the inputs so you can just

6:17make 100% sure that you're using the

6:19same settings so our fast length is 12

6:23our slow length is 26 and our signal

6:27length is N9 and the source is

6:30close this is the standard macd setting

6:33essentially what this is is it's using a

6:36fast length moving average as 12 which

6:40if we look here instead of N9 it's using

6:4212 instead of 20 it's using 26 and then

6:45the signal length the signal is nine so

6:50it's a little different than the moving

6:51averages that I use here but these work

6:53really well on my chart and this is the

6:55standard setting for macd the reason

6:58that you want to use the standard

6:59settings for macd is because you want to

7:01see the same signals that everyone else

7:03is seeing if you start fiddling with

7:05this and changing it it's going to

7:07significantly change the buy and sell

7:09signals and then you're seeing something

7:12that you might be the only person in the

7:13world that is using these settings so

7:16traffic signals as an example work

7:19because everyone respects them everyone

7:21knows what a green light an orange light

7:22and a red light means but if you say you

7:25know what I'm going to be a little crazy

7:26I'm going to use a magenta light I'm

7:28going to use a blue light all of a

7:30sudden you're going to be off on another

7:33planet because no one else is using that

7:36you're going to crash your car and just

7:37like doing that in trading you're going

7:39to start losing money because you're not

7:41going to get the obvious signals so just

7:44as an example I'll I don't mind here um

7:47I'll just copy this let's see so we'll

7:48just copy and we'll paste so we have it

7:50on here twice and I'll just show you

7:52we'll just change this to like a 9 and a

7:5520 and we'll change the signal length to

7:57like a five right so all a sudden it

7:59looks similar but it is going to be

8:01different now you speed it up even more

8:03you change it to a three or a 26 or

8:06let's see make this like a 52 you're

8:08starting to really change the way it

8:10looks so it may not seem super dramatic

8:14to you but it is the difference between

8:17getting the signal at the right time and

8:18at the same time as everyone else or

8:20being just off so you want to make sure

8:23you're timing the market with other

8:24people the reason here is that the

8:28market is

8:30moving because other Traders have a

8:33belief that the price is either going to

8:34go up or go down they're seeing signals

8:38when they see a Buy Signal they execute

8:40buy orders so you kind of want to make

8:42sure you're seeing the same signal as

8:45other Traders because that's going to

8:47help you anticipate where we're going to

8:48see a move up or where we might see

8:50resistance or where we're going to see a

8:51move back down this is what's going to

8:53help you avoid those false breakouts

8:55beginner traders who don't yet use the

8:57macd are going to be more suscep to

9:00falling into the traps of false

9:01breakouts so this is uh again let's see

9:05sgbx this is a chart one minute chart of

9:07a stock that I traded uh just yesterday

9:09I actually made $5,000 on it this was a

9:11pretty nice move and it began right here

9:14at 9:00 a.m. with breaking news that

9:16came out okay so we have breaking news

9:18that comes out top of the hour and so

9:21initially I see the stock on my scanners

9:25so I'm using these uh stock scanners

9:27right here so I'm getting an audio alert

9:29Bing Bing boom stocks on the scans I

9:31pull it up on the one minute chart and

9:34of course I pull up the level too now

9:36when I first take a trade on something

9:38like this I'm not really looking at the

9:40macd in those first few minutes because

9:43the thing is this is a stock that has

9:45been going basically sideways and then

9:47suddenly has news that comes out so I

9:50know that the moving averages are going

9:52to be spiking up that's what they're

9:53always going to look like when you have

9:55breaking news so if we make this really

9:57really big here which you're going to

9:59see is all of a sudden you've got your

10:02nine moving average moving up you've got

10:04your 20 moving up and your 200 is down

10:06here moving very slowly so what we have

10:08what's happening with these indicators

10:10they are diverging right they're

10:13diverging that in that that's because

10:16the price is moving quickly and so

10:17what's happening with the macd this blue

10:20line is moving way above the signal Line

10:23This Is Our signal line and it it'll

10:26continue to move up until the price

10:29price begins to sort of stall out so

10:32right here the price started to stall

10:34out it started the price rolled over a

10:36little bit we came down to the support

10:38of the nine moving average but what

10:39began happening was our moving averages

10:41began to converge they began to come

10:44back together and that was especially

10:46noticeable right here when the price

10:48broke down because when the price broke

10:50down right there that dragged the N9

10:53moving average back down that dragged

10:55the macd back down and right here we

10:58have a Mac

11:00crossover we have the cross where uh the

11:03the fast line here the actual moving

11:06average convergence Divergence line

11:08moves against the signal line coming

11:10back down this for me is a critical

11:12indicator When I See This crossover I am

11:15no longer a

11:16buyer now I'm going to hedge saying that

11:21by saying that as a beginner Trader

11:24you'll find more accuracy if you're only

11:27trading when the macd is open

11:30there are times where I will take a

11:32trade when the macd is against the

11:33position uh and that's because I've got

11:35more experience there are going to be

11:37more advanced setups and they're going

11:38to have lower probability of success but

11:40when they work they can work well so as

11:42a beginner it's best to focus on setups

11:44that have the highest probability of

11:46success so let's watch what happens

11:49right here macd is against the trade

11:51right here so no nothing in here you

11:53should be trading no trade no trade no

11:55trade and then right here we can get

11:58back in now I'm going to do some

11:59something kind of cool and I'm going to

12:00actually drag this and drop it over this

12:05chart right like this I'm going to go

12:07into settings I'm going to turn off um

12:10the histogram so the histogram is turned

12:12off we've got the signal line turned on

12:14right here and um we could make this

12:18let's see sometimes this isn't the way

12:21to do it um so every now and then I will

12:25do something kind of like this but I'm

12:27going to let's see I'm going to keep it

12:29like this for right now this is this is

12:32what I was looking for um I'm going to

12:34make it a little bit Bolder here and

12:37then I'm going to do the same thing on

12:38this one okay so now we we basically

12:43just have it plotted right here just as

12:45a reminder okay so this as soon as I see

12:49this and as soon as I see it curling

12:51here I know what's happening I know this

12:53is getting ready to cross over sometimes

12:55putting it right in front of you makes

12:56it hard to miss right if it's down here

12:59sometimes you might just stop kind of

13:00looking at it so I I'll do this

13:02occasionally and I really encourage this

13:03for beginner Traders okay so we're going

13:06sideways

13:07here and then what happens as we come

13:10into the open we get the crossover do

13:12you see this crossover right here boom

13:14We cross over so we cross back over and

13:16we cross over with strength and look at

13:18this move that we end up getting so we

13:20end up getting a squeeze on this all the

13:22way up here and we stay open the macd

13:24stays open it stays open and we push

13:26higher and higher right so we come up

13:29all the way to this level up here about

13:31620 we start to pull back and then here

13:34we go that's another crossover so if you

13:37imagine focusing on trading this only in

13:40this area here and only in this area

13:43here how do you think you would have

13:45done probably pretty well trading it in

13:48this area here it was sideways this is

13:51not going to pay you we don't make money

13:53buying at five and selling at five or

13:55buying at 380 and selling at 380 we want

13:57to buy at four and sell $5 and we would

14:00love to do that inside of 5 minutes

14:01which is exactly what happened here this

14:03went up over 200% it's about 250% move

14:06this was phenomenal now my feeling is

14:10that if I focus on trading the front

14:13side of the move breaking news first

14:14Spike up that's fine we pull back macd

14:17crosses over again trading this next leg

14:19up that's fine I'm happy to trade the

14:22the beginning the front side of the move

14:23and I want to avoid overtrading when the

14:26macd is against the position so right

14:28here macd is against a position we're

14:30not interested what happens right here

14:34right here the macd begins to cross over

14:37the price starts to pop back up the

14:40price moves above the 9 of the 20 moving

14:42average and then it comes back up to six

14:45now right here when the price popped

14:47back up the macd was still negative

14:49there was nothing to trade right here

14:50when it popped up macd was still

14:52negative right so by this time we had

14:54started to Rally off the low this was

14:57our low point and we'd actually come

14:58back up this much and because we come

15:00back up that much our moving averages

15:02were starting to get back to the

15:04crossover point so now what do you

15:06think's going to happen are we going to

15:06get a false breakout or we going to get

15:08a real breakout based on the position of

15:09the macd we should get a real breakout

15:11and there we go up to seven now we pull

15:14back again we don't cross over we go a

15:16little bit higher this is an area where

15:18oh there we go there's another crossover

15:21now this was I'll admit this was a

15:23bigger pullback here and we almost

15:25crossed over but we didn't quite and

15:27then we came back up so I would forgive

15:28you if you maybe didn't take this trade

15:30here because at this point it was

15:32showing quite a lot of range but then

15:34back you get to this spot here and this

15:36is where in this spot I'd be done I'd

15:39say nope I'm not going to trade that and

15:41when it pops right back Above This is a

15:43high-risk spot and you've got a higher

15:44likelihood of seeing a false breakout

15:47now this did push a little bit higher

15:49but you're always going to do best

15:51focusing on the front side of the move

15:53the beginning of the move so that's

15:55going to be when the news first comes

15:57out and then during the first pullback

15:59now let's look at BNF so this basically

16:04out of nowhere squeezes up and it's kind

16:08of like an example where we have

16:10breaking news except that um this didn't

16:13actually have news it just started to

16:15squeeze up and all of a sudden it

16:16punches higher to 260 the macd is

16:19crossed over uh is positive and is in

16:22favor of the trade so now we watch we

16:24squeeze up to 290 up to three let's see

16:28I'll put this on

16:29Auto we squeeze up to 340 up to 350 we

16:33pull back macd is still open first

16:35pullback do we buy this dip the answer

16:38is yes because the macd is open the macd

16:40is in favor of the trade so those are

16:41dips that we're buying okay we keep

16:44moving forward here we push even higher

16:47right now this is just very strong now

16:49we dip down here and this is a

16:51significant dip and you can see the macd

16:53is starting to come in against the

16:55trade okay now we push a little bit

16:57higher but right there the crossover so

17:00imagine if you stopped trading it right

17:01there and you didn't trade it again for

17:02the rest of the day or at least until

17:05you got another

17:07crossover you would be in good position

17:09for doing that that would have been the

17:10right move right now it start it starts

17:13to come back up but it doesn't cross

17:15over right now right down here you get a

17:17little crossover this at this point this

17:20is later in the day probably wouldn't

17:22have trade of this I like to focus on

17:24trading the front side of the move the

17:26beginning of the move the first pullback

17:29the second pullback now I don't leave

17:31this plotted on here like that I'm just

17:33putting that on there for your benefit

17:34just so you can't miss it just so it's

17:36very obvious this is how I have macd

17:38plotted on my chart so I've got it

17:40plotted right down here and you can see

17:42the way it's moving up like this there

17:44are times where I've changed the

17:45coloring on this and kind of tried to

17:47make it pop a little bit more and that's

17:48fine you could do that but the settings

17:50always stay the same you don't want to

17:52change the settings you start fiddling

17:54with the settings and now you're going

17:56to get different signals from what

17:58everyone else is getting getting now the

18:00people that are using macd will do

18:03better as a result if if they use it

18:07consistently this is one of the biggest

18:08challenges with indicators if you end up

18:11putting 30 indicators on your chart and

18:13you don't check them all before you take

18:15a trade then they're not helpful

18:17checking them periodically or or

18:19checking them intermittently does not

18:21work they work when you follow them on

18:23every single trade you take that's what

18:26you have to do so if you're going to use

18:28macd you got to use it on every trade

18:30and what I would encourage you to do is

18:31use it for a period of a few weeks and

18:33just see does this help me is it helping

18:35me avoid false breakouts is it helping

18:37me remember when to walk away and if it

18:40is you should keep it on your chart now

18:42I've been trading for a long time and

18:43when I first started trading I used macd

18:46I used RSI I used stastics I used a

18:48couple different indicators but I never

18:49really figured out the right way to use

18:51them and So eventually I dropped them

18:53off my chart and for a long time my

18:55charts were very simple because I didn't

18:56have macd on it was just very you know

19:00very pure chart just the candlesticks

19:02and the volume bars and these moving

19:03averages but during the bare Market of

19:072022 uh when the market pulled back

19:09nearly 30% uh I found that macd was

19:13really helping me avoid false breakouts

19:15because we were seeing a lot of false

19:16breakouts we had a real headwind in the

19:18market it was difficult and I needed to

19:20focus on improving my accuracy so when I

19:22popped macd on I really found it helped

19:24me and I've now kept it on since that

19:27time and I really believe that it helps

19:29me in my trading avoid these false

19:31breakouts now if you want to know a

19:33little bit more about technical analysis

19:35I'll put a link in the uh description

19:36I'll pin it to the top of the comments

19:38that you can download my technical

19:40analysis PDF it's the ultimate technical

19:42analysis guide so it's got chart

19:44patterns indicators stuff all the things

19:46that you need to know if you're

19:47interested in trading the strategy that

19:48I trade so check that out pinned in the

19:50top of the comments and you can download

19:52now when it comes to learning when to

19:54walk away this right here is a book

19:56called quit the power of no Knowing When

19:59to Walk Away by Annie Duke this is

20:01something that helped me quite a bit

20:03this helped me understand that the best

20:07Traders will trade longer and dig deeper

20:11when the Market's hot and will walk away

20:14even if they don't hit their daily goal

20:17when the market is cold so in a sense

20:19daily goals are almost Irrelevant for

20:23really good Traders because they'll they

20:25know that yeah when the Market's hot I'm

20:27going to probably far exceed my daily

20:29goal but when the Market's cold it's

20:31going to be hard to get there and it

20:32wouldn't make sense to try to push

20:34really hard to get that daily goal when

20:36the Market's cold it's just not worth it

20:38it's not worth putting in the fight so I

20:41really encourage you to try to detach

20:43yourself from an amount of money you

20:46need to make every day I think it can be

20:49very dangerous and instead try to shift

20:52your focus to optimizing your efficiency

20:56as a Trader when you're making money at

20:58a high rate per hour those are the days

21:02you should trade more hours on the days

21:04when it's not happening those are the

21:06days it's not worth sticking it out so

21:09learn to walk away sooner and instead of

21:11trying to have as many consecutive green

21:13days in a row as you can which is a

21:15stupid thing to worry about but we often

21:17get very obsessed with it focus on how

21:20many consecutive days in a row you can

21:23maintain discipline because if you can

21:25maintain discipline for 30 40 50 days in

21:28a row without falling victim to

21:30emotional hijack without spiraling you

21:33are going to do very well this is about

21:35focusing on the process the profits are

21:38a byproduct if you enjoyed this episode

21:40I hope you hit the thumbs up I hope you

21:42subscribe the channel make sure you

21:43download My ultimate technical analysis

21:45guide and I'll see you for the next

21:47episode on trading strategy right here

21:50[Music]