The Moving Average Convergence Divergence Indicator MACD is both a trend —seeking and momentum indicator which uses several exponential moving averages set to closing prices to generate trading signals. As we had earlier pointed out in one of our trading strategies, the Exponential moving averages use more of recent price data and therefore respond better to current market conditions than the simple moving averages. The MACD indicator is a trend indicator. This function can be ascribed to its moving average components.
The histogram bars of the MACD are a measure of the strength of the trend. Combining these factors allow the MACD to recognize tops and bottoms of trends and hence reversal areas. The Differential Line is the difference between two exponential moving averages.
These are by default, period short term and the period EMAs long term. This is why the MACD indictor settings by default are 12, 26, 9.
The MACD is hardly used alone for trade signalling. This is because it is a lagging indicator. It is best used as a component of trading strategies. The indicator is listed on the MT4 as a momentum indicator. The settings shown below are the default settings for the indicator.
In terms of appearance, some modifications to the look of the indicator can be made either by thickening the lines. The coloured version is a customized modification of the existing indicator. If you want a copy, write to the admin and it will be sent to you. How is the MACD used in forex?
The MACD indicator usually provides three different types of signals:. As discussed, the MACD is not used alone as a trade indicator. It must be combined with another indicator as part of a trading strategy. We have demonstrated several of them in the Forex Strategies section of this blog, including this one.
But here is a simple illustration. A typical long trade setup is shown below. Here we combine some of the things we have identified with the MACD indicator.
Make sure you practice how to trade each setup on a demo account before using the indicator to trade real money. Also pay attention to risk management. We also ask you to refer to the Forex Strategies section to see how all these MACD signals have been deployed in forex strategies. Welcome to the sixth module of the advanced technical analysis course , oscillators.
Remember that momentum is important for price to move in your direction quickly. This indicator will help you to spot the actual setups that will take price in your favor.
The indicator uses a MACD line, a signal line, and a histogram. A signal line is actually a moving average of the MACD line itself. Convergence occurs when the two lines move towards each other, and divergence occurs when they move away from each other.
You will notice that the more divergence exists between the two lines, the higher the histogram is building. This means that when the divergence occurs we have momentum building. The histogram shows you the speed of the move or momentum.
Like we said before, you will notice that you have a histogram building up or down when the two lines are farthest from each other. When the two lines start to move towards each other, the histogram starts to build down towards the zero line.
When the histogram starts to build above zero it, means that momentum is building to the up side. In this case, for example, you see that the histogram starts to build to the up side at the same time that this big blue candle starts to appear on your chart. This means that momentum is building to the up side. On this case, when this candle starts to appear to the down side, you can see that we have divergence from the two lines and we have momentum building to the down side, because the histogram is building below zero.
When the MACD line crosses the center line, we have shifted to an immediate bull market. In this case you can see that when the MACD line crosses below the zero line or the center line, we have switched to an immediate bull market. When it crosses back above it, we have switched to an immediate bull market. This is the overall look of the MACD. First of all for a bull setup.
We have to be clear on something. Unlike other oscillators, we are not looking for extreme readings. This means that we are not looking for the MACD to be above a certain level or below a certain level because the MACD does not show you overbought and oversold readings. It shows you the momentum in price. We also need momentum to start building to the upside, meaning that once we have hit an area of support, we will be looking for a signal line to cross above the MACD line and the histogram to start building to the upside.
You can see that here we have come to a support level, and then we have a signal line crossing above the MACD line and we have momentum building to the upside.
Here we have a great opportunity to go long, and of course our stops should go always below the previous low. In this case, we have a winning trade and we can exit the trade when the signal line crosses below the MACD line and momentum starts building to the downside. As you can see here, by doing this we have caught the best of the move up. In a burst setup at a resistant level we look for a signal line to cross below the MACD line.
The histogram will start building to the downside to know the move has enough momentum to take price down. Another Facebook chart, a 50 minute Facebook chart. You can see here that we have hit a big area of resistance and right here we have the signal line crossing below the MACD line and we have momentum building to the downside. We go short and here we can take out our position when this signal line crosses above the MACD line and momentum starts to fade and build to the upside.
As you can see, we have taken a nice dip on this one to the downside. Practice Trading at eToro Now! Best Forex Brokers Benefits of Trading with our BO Indicator:More...