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MACD Indicator

MACD Indicator

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.

macd histogram

MACD settings

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”.  

MACD Divergence

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.

macd divergence

 

One Response to MACD Indicator

  1. reza says:

    Over the past years i have used the rsi and macd. Look at various markets and mark the tops. Which indicator gives the best feedback for you?

    We all draw differing conclusions around future market direction. The Moving Average Convergence-Divergence Indicator does not appeal to me visually but it could be the perfect indicator for you. The best indicator for trading the forex is subjective.

    Even within a single indicator you may have a preferred element.

    i..e.

    MACD fast line
    MACD signal line
    MACD histogram

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