Best MACD Settings for Day Trading

What is the MACD?

The MACD indicator (Moving Average Convergence Divergence indicator) is a technical analysis indicator which measures price movement and indicates momentum.

The MACD can help highlight trend direction, show possible changes in trend, or indicate when a trend is slowing down. The MACD can also be used to generate trade signals.

The MACD includes two lines: one which is the MACD, and another called the signal line which is a slower-moving version of the MACD. When those two lines cross, it could be used as a trade signal.

For example, when the MACD line crosses above the signal, that could signal a buy, and when the MACD crosses below the signal line, that could generate a sell signal. I’ll explain why this is in the next section, but for now, here is an example of how these basic concepts work.

How the MACD Works

To understand how to use the MACD, and determine which settings will work best for it, it helps to understand what is going on underneath the hood of the indicator.

If you add the MACD indicator to your chart and then click on its settings, you will see three primary input fields. These are:

• Fast length
• Slow length
• Signal smoothing

These will likely already be filled in with the default settings of 12, 26, and 9 respectively. What the MACD line on the indicator is measuring is the distance between a 12 and 26-period moving average of the price movement.

If you were to plot a 12- and 26-period moving average on the chart and then measured the distance between these two averages, that is the reading the MACD is giving us at any moment in time.

The chart above has been zoomed in a bit and the cursor/vertical line (10:50 am) is showing a particular point in time. Looking at the top left, we can see the 26-period moving is at 171.38 and the 12-period is at 172.34. That’s a difference of 0.96.

If you look at the MACD reading for that moment (shown by the blue number), it says -0.9601, meaning the 12-period is below the 26-period moving average by $0.96. When the 12-period is above the 26-period, the MACD reading will be a positive number.

Looking at the chart above, you will also notice that when the blue MA 12 crosses below the red MA 26, the MACD indicator (blue) crosses below 0, because now the numbers are negative. If the MA 12 crosses above the MA 26, then the MACD will move into positive numbers, crossing above the zero line.

Some people also use the zero line for trading signals by buying when the price crosses above the zero line and selling when MACD crosses below it. This is equivalent to buying when the MA 12 crosses above or below the MA 26.

There is an extra line on the MACD indicator, colored orange in this case. It is called the signal line. It is simply a slower version of the MACD. In this case, it is a nine-period moving average of the MACD line. As mentioned in the prior section, when the MACD crosses the signal line, these can also be used as trade signals.

Best MACD Settings for Trading 1, 5, 15, and 30-Minute Charts

Day traders use different chart time frames. One-minute, five-minute, 15-minute, and 30-minute charts are all common choices. How can we determine the best MACD for trading on these time frames?

Generally, the default settings tend to work best across various time frames. As discussed before, that would involve using the 12, 26, and 9 settings.

Why is this? Each time frame, and each asset, may have parameters that work slightly better. But you are talking about infinite possible combinations, and the best combination on a 5-minute chart may not work as well on a 1-minute chart, or it may work well in one forex pair, but other pairs or stocks, for example.

Therefore, as a general guideline, the default setting is a good starting point. If you only trade a specific time frame, and only trade specific assets, then you may be able to customize the settings to work better for you. More on that in the next section.

If you trade various time frames, or you trade different assets (futures, currency pairs, stocks, CFDs, commodities, and so on) then it is probably best to use the default settings on all of them.

Testing Which MACD Settings Work Best for You

If you only trade a specific asset and time frame, it becomes much easier to zero in on which MACD settings will generate the most profit for you.

The simplest way to test settings is to pull up a chart of the asset with the chart time frame you trade. Apply a MACD to the chart and then test various settings to see which works better for you.

Before doing this, you will define how exactly how you are using the MACD, and what the specific requirements for entering and exiting trades are. This is all part of a document called the trading plan, which lays out how we trade.

Once you know how we will enter and exit trades, then you can test different MACD settings to see which produces the most profit, keep losses the smallest, or whatever metric you are aiming to improve.

Personally, I like to test manually. On a sheet of paper, I will write down all the profits and losses the strategy/parameters produced over the last 40 to 60 trading days (two to three months). If you only trade part of the day, only include profits and losses for the part of the day you actually trade.

This tells you if the strategy is profitable or not. If it is, you can do more testing and possibly chart trading the system either in a demo account, or with small amounts of capital. If it continues to work, increase the amount of capital used.

You can also continue to test other MACD settings to see if they produce better results using the same process. I like to do it manually so I see exactly what each trade looks like. It’s like practicing hundreds of trades before you even place an order.

There is also the option to test for the MACD settings using an automated trading program. Some websites allow you to test various MACD settings over years of data. Most of these sites or software cost a fee. Backtesting may also be included within your broker’s software or your charting platform. For example, TradingView has strategy backtesting capabilities.

MACD Divergence

MACD divergence is another MACD analysis tool you can use to enhance your day trading. Divergence occurs when the MACD and price are moving in different directions, or don’t align in some way.

There is positive divergence and negative divergence. Negative divergence, or bearish divergence, is when the price moves above its prior swing but the MACD is below its prior swing high.

It shows that momentum is potentially slowing, or at least that the current rise in price is not moving as rapidly as the prior rise. This is a potentially bearish signal.

Positive divergence, or bullish divergence, is when the price drops below its prior swing low, but the MACD is above its prior swing low. It shows selling momentum is slowing, or that the most recent drop is not at fast as the prior drop. This is a potentially bullish signal.

Divergence is an additional tool that can be used to fine-tune trading. For example, you may wish to see divergence before taking a trading signal. Divergence can (but not always) signal a reversal in the current trend. The following chart shows an example of both negative and positive divergence.