Hello and welcome to CantosCharts Masterclass. I'm Sandy Jadeja, Chief Market Strategist with CMS FX. Welcome to another lesson in technical analysis and how to look at charts and technical indicators. As always, this is simply for education and information purposes only.

We're going to continue by looking at another technical indicator in this lesson, and that's the MACD - or sometimes referred to as the Mac-D.

Well, what exactly is the MACD? Essentially it uses two moving averages, typically a nine- and a 26-period exponential moving average. And there are some times, on some charts, you will see a histogram which plots the difference between the two moving averages.

Now, there are several ways to use the MACD, and I'll highlight how you can simply use a MACD to best get some trading results that are efficient.

The zero line is used as a bullish and a bearish indication, and I'll go into more detail about that. But there's also the MACD crossover, and also the divergences, which can be used as a utility.

So, let's take a look at this here. This is the MACD. We're using the 12- and 26-period and obviously the zero line. The thing that stands out the most is it looks like a moving average crossover. Well, essentially, that's what it actually is. The key thing here, though, you'll often find the Mac-D plotted on the lower side of the charts. Sometimes, in some cases, some traders do prefer to put them on the top.

But here, what we're looking for is either a crossover or a divergence. Now, if we take a look at this particular chart here, this is the FTSE 100 Index on a daily timeframe. First of all, let's observe the zero line. What we're really looking for is the Mac-D to be above or below the zero line. The second thing we're looking for is a crossover.

So, for example, here, on the extreme left-hand side, we notice that there's a crossover of the MACD. And then notice it goes above the zero line. So at this point here, the market starts to trend towards the upside. Now, along the way, there have been many crossovers. Does that mean that you should take each and every signal? No. we'll go into a little bit more detail about signals in a couple of minutes. But right now, what we want to observe is as long as the Mac-D is above the zero line, we should be looking for long positions.

Now, there are various methods to exit your positions, but I won't go into detail so much here. For long-term traders, though, we notice all the way along over here, after several months, the MACD eventually came down below the zero line and also crossed below that. So we actually had either an exit signal or a short signal here.

Again, notice here the MACD is crossed above the zero line, and it's crossed above the moving averages. We have a buy signal. So right now, the way we look at the market is, short-term at least, it's looking bullish and as long as it takes this high out over here, the odds are that we could see higher highs coming in.

Now, on this particular chart, this is a weekly timeframe. So this is the longer-term timeframe. This area here, we saw the MACD both cross over as well as cross above and below the zero line. So we actually had some mixed signals here. What a great time to use the MACD in these instances.

Then, of course, we notice that it clearly came right below the zero line, and there was a crossover in the MACD. And at this point here, we notice that there was a downtrend. Now, also observe that the market did go higher. The MACD, however, had stayed below the zero line, indicating that maybe this was just a pullback against the dominant trends.

All across here, though, we would have been looking for bearish signals. Then, just at this point here, we see a MACD crossover and above the zero line. That's indicating that maybe the downward move is now over on the longer-term timeframe, and we're now looking for an upside move.

So if I come back to the daily chart, what I want to highlight is essentially this blue line right in the charts going vertically. Anything above on the right-hand side here, we would have been looking for long signals, because that's where on the weekly charts, the Mac-D crossed over.

So here we have a valid signal. The signal before that we would have ignored that as a buy signal on a daily chart, because at that particular point in time, on the weekly chart, the MACD had been trending down.

So this is a nice signal here. The market's gone higher. We would have exited that position just over here, and we would now re-enter a long position towards the very end of the chart.

So, with the MACD, you must notice that it's a lagging indicator. It will never give you signals in advance, as do other indicators. They do lag behind price.

We look at the large-degree timeframe for the trend, and then of course we enter and exit on the lower-degree timeframe.

So if you're using your weekly, observe that for the trend and the dailies for your entries and exits. And then, of course, look for divergences, which is essentially when the MACD is trading higher but the price is trading lower. There's a signal there which you could say, 'Well, actually, which one are we going to be following?'

I'm going to cover divergences in much more detail in another lesson. The MACD can be useful for trend trading and also for spotting the divergences in the market. And of course, the Mac-D Moving Average Convergence-Divergence is the key name behind this. So we do want to delve into more details, but we'll break that down into a two-part lesson over the coming weeks.

Next lesson we're going to look at is trading with the stochastic indicator. In the meantime, have a great trading week. This is Sandy Jadeja.