Introduction to the MACD 2 Indicator
The MACD is a classic oscillator which seasoned traders use. It is very common for seasoned traders to use the MACD as a basis for identifying potential reversals.
The MACD 2 Indicator was developed as an improvement to the classic MACD using a simple modification which should make it more responsive to price movements.
What is the MACD 2 Indicator?
The MACD 2 Indicator is a modification of the classic Moving Average Convergence and Divergence or MACD Indicator. It has the same components as the classic MACD Indicator, which has a MACD line and a signal line. The difference is that the classic MACD Indicator pre-installed with the MT4 platform uses a Simple Moving Average (SMA) as a signal line, while this MACD 2 Indicator uses an Exponential Moving Average (EMA) as a signal line.
How the MACD 2 Indicator Works?
The MACD2 Indicator computes for the difference between a short period and a long period Exponential Moving Average. The difference between the two forms the MACD line. It then derives an Exponential Moving Average from the MACD line, which would then form the signal line. Both lines would become oscillators which oscillate around zero.
This indicator then computes for the difference between the MACD line and the signal line. It would then plot the difference as histogram bars. It would plot a green bar whenever the current bar has a higher value than the prior bar, and a red bar whenever the current bar has a lower value than the prior bar.
How to use the MACD 2 Indicator for MT4
The MACD 2 Indicator just has three variables which control the MACD line and the signal line.
“FastEMA” and “SlowEMA” pertains to the number of periods used by the indicator for its underlying fast EMA line and slow EMA line, which are then used to compute for the MACD line.
The “SignalEMA” variable allows users to modify the number of periods used to compute for the signal line derived from the MACD line.
Trend direction can be identified based on whether the MACD line is generally positive or negative.
Momentum and trend direction can also be identified based on how the MACD line and the signal line overlaps, wherein the momentum is bullish if the MACD line is above the signal line, and bearish whenever the MACD line is below the signal line.
As an oscillator, the MACD line can also be effectively used as a basis for divergences.
Buy Trade Setup
When to Enter?
Open a buy order on the confluence of a bullish divergence and the MACD line crossing above the signal line coming from below zero. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as the MACD line crosses below the signal line.
Sell Trade Setup
When to Enter?
Open a sell order on the confluence of a bearish divergence and the MACD line crossing below the signal line coming from above zero. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as the MACD line crosses above the signal line.
Conclusion
The MACD is a classic oscillator which many seasoned profitable traders use. The MACD 2 Indicator is simply a slight improvement from the MACD. The use of an EMA to compute for the signal line allows the MACD 2 indicator move with less lag since EMA lines tend to be more responsive to recent price movements.
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