The MACD (Moving Average Convergence Divergence) Indicator.
Understanding how to buy and sell, in direction of the near term directional bias, is often a struggle for traders. Some traders consider the MACD indicator to be the correct tool for the job of identifying trend, or more specifically momentum. Traders will always be looking for ways to to quantify the “trend”.
The moving average convergence divergence (MACD) indicator was created by Gerald Appel, and he is said to have come up with this indicator in the late 1970s. Even while the name of the indicator does seem rather elaborate, it is actually rather straightforward to work with. Keep reading to find out tips on how to potentially integrate this particular technical trading instrument into your current Forex trading methodology. There are no holy grail indicators but the MACD could potentially be the one which suits your trading strategy.
The attraction of this MACD technical indicator is primarily due to its capability to be employed for rapid identification of any rising momentum. Having said that, prior to delving into the technicalities within the MACD, you will need to understand fully the connection between the slow and fast moving averages.
Technical Forex traders might wait for the fast MA to push over the slow one and utilize that to identify growing bullish momentum. This kind of cross-over, of the moving averages, points to the price moving quicker than it seems to have previously which is a typical buy signal that many traders use. The moving averages can often be seen diverging apart from one another when the energy from the momentum raises. The MACD was created to trade when seeing this divergence simply by examining the delta around these moving averages. The convergence/divergence between the moving averages is most easily identified when using a MACD histogram as per the chart below.
The typical setting for the MACD, and one that often comes as default is 12,26,9 periods. Are these the best MACD settings? This is something you can experiment with when testing your strategy. It is often a case of finding the happy medium between lagging too much and false signals. As the MACD is built on the moving averages, it is obviously, inherently, going to be a “lagging indicator”.
The MACD can also be used to identify any divergence between price and the indicator readings. This is often seen as a better way of utilising the indicator. See how price makes a new high but the MACD fails to mirror this move. The divergence can last for a long time though so it may be worthwhile looking for a price action reversal to confirm any entry. Conversely, the bullish divergence has formed after a security prints a lower swing low and then the MACD subsequently forms a new higher low. This lower low print from the associated security affirms this downtrend, however, this higher low on the MACD is indicative of a decrease in the downside momentum.