What is the ‘Moving Average Convergence Divergence – MACD’
Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the “signal line”, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
BREAKING DOWN ‘Moving Average Convergence Divergence – MACD’
Moving average convergence divergence (MACD) indicators can be interpreted using three different methods:
1. Crossovers – As shown in the chart above, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting getting “faked out” or entering into a position too early, as shown by the first arrow.
2. Divergence – When the security price diverges from the MACD, it signals the end of the current trend. For example, a stock price that is rising and a MACD indicator that is falling could mean that the rally is about to end. Conversely, if a stock price is falling and the MACD is rising, it could mean that a bullish reversal could occur in the near-term. Traders often use divergence in conjunction with other technical indicators to find opportunities.
3. Dramatic Rise – When the MACD rises dramatically – that is, the shorter moving average pulls away from the longer-term moving average – it is a signal that the security is overbought and will soon return to normal levels. Traders will often combine this analysis with the Relative Strength Index (RSI) or other technical indicators to verify overbought or oversold conditions.
Traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. As you can see from the chart above, the zero line often acts as an area of support and resistance for the indicator.
What is the ‘Money Flow Index – MFI’
This Strategy uses MFI in conjunction with the Heiken-Ashi candlesticks for a simple profitable scalping setup.
The money flow index (MFI) is a momentum indicator that measures the inflow and outflow of money into a security over a specific period of time. The MFI uses a stock’s price and volume to measure trading pressure. Because the MFI adds trading volume to the relative strength index (RSI), it’s sometimes referred to as volume-weighted RSI.
BREAKING DOWN ‘Money Flow Index – MFI’
The value of the MFI is always between 0 and 100, and calculating it requires several steps. The developers of the MFI, Gene Quong and Avrum Soudack, suggest using a 14-day period for calculations. Step one is to calculate the typical price. Second, the raw money flow is calculated. The third step is to calculate the money flow ratio using the positive and negative money flows for the previous 14 days. Finally, using the money flow ratio, the MFI is calculated. Formulas for each of these items are as follows:
- Typical price = (high price + low price + closing price) / 3
- Raw money flow = typical price x volume
- Money flow ratio = (14-day Positive Money Flow) / (14-day Negative Money Flow)
(Positive money flow is calculated by summing up all of the money flow on the days in the period where the typical price is higher than the previous period typical price. This same logic applies for the negative money flow.)
- MFI = 100 – 100 / (1 + money flow ratio)
Many traders watch for opportunities that arise when the MFI moves in the opposite direction as the price. This divergence can often be a leading indicator of a change in the current trend. An MFI of over 80 suggests the security is overbought, while a value lower than 20 suggest the security is oversold.
Money Flow Index Calculation Example
While a 14-day period is typically used in calculating the MFI, for simplicity’s sake, below is a four-day example. Assume a stock’s high, low and closing prices for four days are listed along with volume as:
- Day one: high = $24.60, low = $24.20, closing = $24.28, volume = 18,000 shares
- Day two: high = $24.48, low = $24.24, closing = $24.33, volume = 7,200 shares
- Day three: high = $24.56, low = $23.43, closing = $24.44, volume = 12,000 shares
- Day four: high = $25.16, low = $24.25, closing = $25.05, volume = 20,000 shares
Using the above formula, the typical prices are:
- Day one = $24.36
- Day two = $24.35
- Day three = $24.14
- Day four = $24.82
Raw money flow for each day is:
- Day one = $24.36 x 18,000 = 438,487
- Day two = $24.35 x 7,200 = 175,323
- Day three = $24.56 x 12,000 = 289,736
- Day four = $25.16 x 20,000 = 496,400
Money flows are:
- Positive money flow = 438,487 + 496,400 = 934,887
- Negative money flow = 175,323 + 289,736 = 465,059
- Money flow ratio = 934,887 / 465,059 = 2.01
- Money flow index = 100 – 100 / (1 + 2.01) = 100 – 33.22 = 66.78
Simple 5-Minute Bitcoin Trading Strategy
This strategy video uses MFI and MACD in conjunction on the 5-Minute timeframe for simple entries and exits .
Conservative Method – 0:33 Aggressive Method – 2:41