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

[Music] in today's episode I'm going to walk you through how to use macd in your trading to help you number one avoid false breakouts number two focus on trading on the front side of the move and not overtrade the back side when the price action becomes congested this is an indicator you can use whether you're trading stocks Forex Futures cryptocurrency doesn't matter because macd is a well-respected indicator this is part of the universal language of the financial markets that is technical analysis so let's go ahead and jump onto the charts I'm going to use a

case study here this is a stock that I traded uh just yesterday I locked up about $5,000 of profit on it and macd was a big contributor to being able to to lock up that profit and most importantly not overstay my welcome overstaying your welcome how many of you struggle with not knowing when to walk away each day I'm going to give you some tips during this episode to help you with that problem I'll even give you some recommended readings so you can really dive in now let's look at the one minute chart as an

active day trader I'm using the 1 minute and the 5 minute time frames for finding my entries and exits if you're trading a swing trading strategy or you're using different time frames then you can use the macd on the time frame that's relevant for you it doesn't really matter because it's valid on all time frames now Mac d stands for it's an acronym that stands for moving average convergence Divergence so what is it's measuring is when moving averages are either diverging and moving apart or when they're converging and moving together in classic long-term investing there

are significant moving average crossovers that investors look at as uh indicating a very significant change in Trend so if the price for instance has been selling off for a long time and then starts to come back up what you may see is let's just say this is a long-term chart this is the under moving average which has been selling off like this the the price has been you know sort of down here like this but it's begun to turn around here what you would notice would be uh the 200 moving averages here and then let's

just say your 100 100 moving average crosses over right here so this is a moving average crossover moving average crossovers can be very significant for uh for Traders and investors because it signals a significant change in Trend and it's valid uh both on uh daily charts but also on short-term time frames so I think to help you better understand how macd works and why it's so important it's helpful to First give you a foundation in moving averages because after all macd uh is taking moving averages as part of its calculation so let's say for instance

we have um uh it could be a stock it could be anything doesn't matter it could be an indic uh let's just say the price is kind of slowly starting to move up and starts to pull away here before dipping down a little bit and then pushing a little bit higher so we would call this a traditional pullback pattern that generally I would enjoy trading something like this but let's say it starts to move up here and then it kind of stalls out and the price kind of goes sideways through this area let's just say

for instance so the way this would look on our chart is we would see our moving averages moving right behind the price when the price is moving up your moving average is always going to be a little bit below because this is plotted based on the average price over the last X number of periods now this is a moving average that I use which is the nine period moving average so that means each one of these dots is the average price over the last nine Candles now if the price is moving up the average isn't

way up here because you got to factor in the prices were lower back here so it always Trails slightly behind now I personally use exponential moving averages in my trading and exponential moving average is different from a simple moving average you have an SMA or an EMA s SMA is a simple moving average EMA is an exponential moving average a simple moving average is simple because it just takes the average price over these last candles whereas an exponential moving average takes the more recent price action and weights it more heavily and what that means is

that a 9 SMA versus a 9 EMA will look like this this right here is going to be the em Ma and this is going to be the SMA so the SMA will always be lower than the EMA because it takes longer for the averages to move up when you're waiting more recent price action heavier then the price moves faster so what we look at generally when the price is moving up quickly you've got your short-term moving averages are going that are going to move quickly and then you've got longer moving averages like this the

20 EMA they're going to move a little bit slower so the 20 EMA moves slower because it's taking the average price over the last 20 candles so it's going further back and then you'd have an indicator a moving average that's even lower than that for instance the 200 EMA so these popular indicators can form this uh ribbon here in a sense and when they're all stacked above each other like this then this is a time that we would be very bullish on a trade however what can happen naturally is if the price suddenly Clines you

could have a moving average crossover when you have a moving average crossover it's indicating a change in Trend and the macd is helping us visualize that in a way that's much more obvious than having it plotted on your chart with just the indicators alone so if we look at our one minute chart again here what you'll notice is that I have macd plotted at the bottom so this bottom section right here is the macd now I always get Traders asking me Ross what are your macd settings so I I make this extremely simple my macd

settings are standard they are default I do not change them from the default setting that comes when you initially put macd on your chart now most platforms are going to put on the same settings but I'll double click this and show you the inputs so you can just make 100% sure that you're using the same settings so our fast length is 12 our slow length is 26 and our signal length is N9 and the source is close this is the standard macd setting essentially what this is is it's using a fast length moving average as

12 which if we look here instead of N9 it's using 12 instead of 20 it's using 26 and then the signal length the signal is nine so it's a little different than the moving averages that I use here but these work really well on my chart and this is the standard setting for macd the reason that you want to use the standard settings for macd is because you want to see the same signals that everyone else is seeing if you start fiddling with this and changing it it's going to significantly change the buy and sell

signals and then you're seeing something that you might be the only person in the world that is using these settings so traffic signals as an example work because everyone respects them everyone knows what a green light an orange light and a red light means but if you say you know what I'm going to be a little crazy I'm going to use a magenta light I'm going to use a blue light all of a sudden you're going to be off on another planet because no one else is using that you're going to crash your car and

just like doing that in trading you're going to start losing money because you're not going to get the obvious signals so just as an example I'll I don't mind here um I'll just copy this let's see so we'll just copy and we'll paste so we have it on here twice and I'll just show you we'll just change this to like a 9 and a 20 and we'll change the signal length to like a five right so all a sudden it looks similar but it is going to be different now you speed it up even more

you change it to a three or a 26 or let's see make this like a 52 you're starting to really change the way it looks so it may not seem super dramatic to you but it is the difference between getting the signal at the right time and at the same time as everyone else or being just off so you want to make sure you're timing the market with other people the reason here is that the market is moving because other Traders have a belief that the price is either going to go up or go down

they're seeing signals when they see a Buy Signal they execute buy orders so you kind of want to make sure you're seeing the same signal as other Traders because that's going to help you anticipate where we're going to see a move up or where we might see resistance or where we're going to see a move back down this is what's going to help you avoid those false breakouts beginner traders who don't yet use the macd are going to be more suscep to falling into the traps of false breakouts so this is uh again let's see

sgbx this is a chart one minute chart of a stock that I traded uh just yesterday I actually made $5,000 on it this was a pretty nice move and it began right here at 9:00 a.m. with breaking news that came out okay so we have breaking news that comes out top of the hour and so initially I see the stock on my scanners so I'm using these uh stock scanners right here so I'm getting an audio alert Bing Bing boom stocks on the scans I pull it up on the one minute chart and of course

I pull up the level too now when I first take a trade on something like this I'm not really looking at the macd in those first few minutes because the thing is this is a stock that has been going basically sideways and then suddenly has news that comes out so I know that the moving averages are going to be spiking up that's what they're always going to look like when you have breaking news so if we make this really really big here which you're going to see is all of a sudden you've got your nine

moving average moving up you've got your 20 moving up and your 200 is down here moving very slowly so what we have what's happening with these indicators they are diverging right they're diverging that in that that's because the price is moving quickly and so what's happening with the macd this blue line is moving way above the signal Line This Is Our signal line and it it'll continue to move up until the price price begins to sort of stall out so right here the price started to stall out it started the price rolled over a little

bit we came down to the support of the nine moving average but what began happening was our moving averages began to converge they began to come back together and that was especially noticeable right here when the price broke down because when the price broke down right there that dragged the N9 moving average back down that dragged the macd back down and right here we have a Mac crossover we have the cross where uh the the fast line here the actual moving average convergence Divergence line moves against the signal line coming back down this for me

is a critical indicator When I See This crossover I am no longer a buyer now I'm going to hedge saying that by saying that as a beginner Trader you'll find more accuracy if you're only trading when the macd is open there are times where I will take a trade when the macd is against the position uh and that's because I've got more experience there are going to be more advanced setups and they're going to have lower probability of success but when they work they can work well so as a beginner it's best to focus on

setups that have the highest probability of success so let's watch what happens right here macd is against the trade right here so no nothing in here you should be trading no trade no trade no trade and then right here we can get back in now I'm going to do some something kind of cool and I'm going to actually drag this and drop it over this chart right like this I'm going to go into settings I'm going to turn off um the histogram so the histogram is turned off we've got the signal line turned on right

here and um we could make this let's see sometimes this isn't the way to do it um so every now and then I will do something kind of like this but I'm going to let's see I'm going to keep it like this for right now this is this is what I was looking for um I'm going to make it a little bit Bolder here and then I'm going to do the same thing on this one okay so now we we basically just have it plotted right here just as a reminder okay so this as soon

as I see this and as soon as I see it curling here I know what's happening I know this is getting ready to cross over sometimes putting it right in front of you makes it hard to miss right if it's down here sometimes you might just stop kind of looking at it so I I'll do this occasionally and I really encourage this for beginner Traders okay so we're going sideways here and then what happens as we come into the open we get the crossover do you see this crossover right here boom We cross over so

we cross back over and we cross over with strength and look at this move that we end up getting so we end up getting a squeeze on this all the way up here and we stay open the macd stays open it stays open and we push higher and higher right so we come up all the way to this level up here about 620 we start to pull back and then here we go that's another crossover so if you imagine focusing on trading this only in this area here and only in this area here how do

you think you would have done probably pretty well trading it in this area here it was sideways this is not going to pay you we don't make money buying at five and selling at five or buying at 380 and selling at 380 we want to buy at four and sell $5 and we would love to do that inside of 5 minutes which is exactly what happened here this went up over 200% it's about 250% move this was phenomenal now my feeling is that if I focus on trading the front side of the move breaking news

first Spike up that's fine we pull back macd crosses over again trading this next leg up that's fine I'm happy to trade the the beginning the front side of the move and I want to avoid overtrading when the macd is against the position so right here macd is against a position we're not interested what happens right here right here the macd begins to cross over the price starts to pop back up the price moves above the 9 of the 20 moving average and then it comes back up to six now right here when the price

popped back up the macd was still negative there was nothing to trade right here when it popped up macd was still negative right so by this time we had started to Rally off the low this was our low point and we'd actually come back up this much and because we come back up that much our moving averages were starting to get back to the crossover point so now what do you think's going to happen are we going to get a false breakout or we going to get a real breakout based on the position of the

macd we should get a real breakout and there we go up to seven now we pull back again we don't cross over we go a little bit higher this is an area where oh there we go there's another crossover now this was I'll admit this was a bigger pullback here and we almost crossed over but we didn't quite and then we came back up so I would forgive you if you maybe didn't take this trade here because at this point it was showing quite a lot of range but then back you get to this spot

here and this is where in this spot I'd be done I'd say nope I'm not going to trade that and when it pops right back Above This is a high-risk spot and you've got a higher likelihood of seeing a false breakout now this did push a little bit higher but you're always going to do best focusing on the front side of the move the beginning of the move so that's going to be when the news first comes out and then during the first pullback now let's look at BNF so this basically out of nowhere squeezes

up and it's kind of like an example where we have breaking news except that um this didn't actually have news it just started to squeeze up and all of a sudden it punches higher to 260 the macd is crossed over uh is positive and is in favor of the trade so now we watch we squeeze up to 290 up to three let's see I'll put this on Auto we squeeze up to 340 up to 350 we pull back macd is still open first pullback do we buy this dip the answer is yes because the macd

is open the macd is in favor of the trade so those are dips that we're buying okay we keep moving forward here we push even higher right now this is just very strong now we dip down here and this is a significant dip and you can see the macd is starting to come in against the trade okay now we push a little bit higher but right there the crossover so imagine if you stopped trading it right there and you didn't trade it again for the rest of the day or at least until you got another

crossover you would be in good position for doing that that would have been the right move right now it start it starts to come back up but it doesn't cross over right now right down here you get a little crossover this at this point this is later in the day probably wouldn't have trade of this I like to focus on trading the front side of the move the beginning of the move the first pullback the second pullback now I don't leave this plotted on here like that I'm just putting that on there for your benefit

just so you can't miss it just so it's very obvious this is how I have macd plotted on my chart so I've got it plotted right down here and you can see the way it's moving up like this there are times where I've changed the coloring on this and kind of tried to make it pop a little bit more and that's fine you could do that but the settings always stay the same you don't want to change the settings you start fiddling with the settings and now you're going to get different signals from what everyone

else is getting getting now the people that are using macd will do better as a result if if they use it consistently this is one of the biggest challenges with indicators if you end up putting 30 indicators on your chart and you don't check them all before you take a trade then they're not helpful checking them periodically or or checking them intermittently does not work they work when you follow them on every single trade you take that's what you have to do so if you're going to use macd you got to use it on every

trade and what I would encourage you to do is use it for a period of a few weeks and just see does this help me is it helping me avoid false breakouts is it helping me remember when to walk away and if it is you should keep it on your chart now I've been trading for a long time and when I first started trading I used macd I used RSI I used stastics I used a couple different indicators but I never really figured out the right way to use them and So eventually I dropped them

off my chart and for a long time my charts were very simple because I didn't have macd on it was just very you know very pure chart just the candlesticks and the volume bars and these moving averages but during the bare Market of 2022 uh when the market pulled back nearly 30% uh I found that macd was really helping me avoid false breakouts because we were seeing a lot of false breakouts we had a real headwind in the market it was difficult and I needed to focus on improving my accuracy so when I popped macd

on I really found it helped me and I've now kept it on since that time and I really believe that it helps me in my trading avoid these false breakouts now if you want to know a little bit more about technical analysis I'll put a link in the uh description I'll pin it to the top of the comments that you can download my technical analysis PDF it's the ultimate technical analysis guide so it's got chart patterns indicators stuff all the things that you need to know if you're interested in trading the strategy that I trade

so check that out pinned in the top of the comments and you can download now when it comes to learning when to walk away this right here is a book called quit the power of no Knowing When to Walk Away by Annie Duke this is something that helped me quite a bit this helped me understand that the best Traders will trade longer and dig deeper when the Market's hot and will walk away even if they don't hit their daily goal when the market is cold so in a sense daily goals are almost Irrelevant for really

good Traders because they'll they know that yeah when the Market's hot I'm going to probably far exceed my daily goal but when the Market's cold it's going to be hard to get there and it wouldn't make sense to try to push really hard to get that daily goal when the Market's cold it's just not worth it it's not worth putting in the fight so I really encourage you to try to detach yourself from an amount of money you need to make every day I think it can be very dangerous and instead try to shift your

focus to optimizing your efficiency as a Trader when you're making money at a high rate per hour those are the days you should trade more hours on the days when it's not happening those are the days it's not worth sticking it out so learn to walk away sooner and instead of trying to have as many consecutive green days in a row as you can which is a stupid thing to worry about but we often get very obsessed with it focus on how many consecutive days in a row you can maintain discipline because if you can

maintain discipline for 30 40 50 days in a row without falling victim to emotional hijack without spiraling you are going to do very well this is about focusing on the process the profits are a byproduct if you enjoyed this episode I hope you hit the thumbs up I hope you subscribe the channel make sure you download My ultimate technical analysis guide and I'll see you for the next episode on trading strategy right here [Music]