Introduction to the MACD Colored Indicator
One of the ways traders use the MACD oscillator is to take reversal trade signals whenever the MACD bars would cross the signal line coming from an extremely overbought or oversold level. These scenarios are typical mean reversal setups based on the MACD.
The MACD Colored Indicator is a tool which simplifies this type of reversal signals by causing the bars to change color whenever the MACD bars and the signal line crossover.
What is the MACD Colored Indicator?
The MACD Colored Indicator is a momentum-based technical indicator which is a modified version of the classic Moving Average Convergence and Divergence (MACD) oscillator.
This version of the MACD plots bars to represent the MACD and pairs the MACD bars with a signal line.
The difference between the MACD Colored Indicator and the basic MACD oscillator is that this version of the MACD has MACD bars that change color to indicate a probable momentum or trend reversal.
It plots lime bars to indicate a strong bullish trend and red bars to indicate a strong bearish trend. It also plots gray bars to indicate a weakening trend or a potential trend reversal.
How the MACD Colored Indicator Works?
The MACD Colored Indicator works the same way as the classic MACD. It calculates for the difference between two Exponential Moving Averages (EMA). The difference is used as the basis for plotting the MACD bars. It then calculates for the signal line, which is a Simple Moving Average (SMA) of the MACD bars.
The difference is that the color changes depending on the value of the MACD bars compared to the signal line.
The bars are lime whenever the MACD bars are positive and are above the signal line. The bars are red whenever the MACD bars are negative and have lower values compared to the signal line. Otherwise it plots gray bars.
How to use the MACD Colored Indicator for MT4
The MACD Colored Indicator has three variables which are similar to the classic MACD oscillator.
The “fast ema period” refers to the number of bars used to calculate for the faster EMA value, while the “slow ema period” refers to the number of bars used to calculate for the slower EMA value.
The “signal period” variable refers to the number of periods used to calculate for the signal line.
These variables are used to modify the sensitivity and characteristics of the MACD Colored bars.
Buy Trade Setup
When to Enter?
Open a buy order as soon as the MACD bars cross above the signal and change to gray coming from an extremely low MACD value.
When to Exit?
Allow the MACD bars to cross above zero and change to lime then close the trade as soon as the MACD bars change back to gray.
Sell Trade Setup
When to Enter?
Open a sell order as soon as the MACD bars cross below the signal and change to gray coming from an extremely high MACD value.
When to Exit?
Allow the MACD bars to cross below zero and change to red then close the trade as soon as the MACD bars change back to gray.
Conclusion
The example shown above is that of a mean reversal setup. However, there are other ways to use this indicator such as a trend continuation trade based on the resumption of momentum.
The crossover between the MACD bars and the signal line can be an effective trade signal, but it is not perfectly accurate. Traders should still find confluences with other signals for better accuracy.
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