Moving Average Convergence Divergence (MACD) Simplified
Moving Average Convergence Divergence (MACD) is one of the most used technical analysis indicator in the Forex market commonly known as a lagging indicator because it is based on the moving average but is more sensitive of the price movements.
Moving Average Convergence Divergence (MACD) is one of the most used technical analysis indicator in the Forex market. It is a lagging indicator because it is based on the moving average but is more sensitive of the price movements. This economic indicator is developed and introduced by Mr. Gerald Appel.
MACD uses exponential moving averages (EMA). It should estimate the difference between two exponential moving averages to calculate MACD and is recommended to apply the 26-day and 12-day moving averages of a currency pair. MACD indicator consists of two lines. The first line is the MACD line that uses the 12 period exponential moving average of the price minus 26 period exponential moving average of the price.
MACD = EMA [shorter period] - EMA[longer period]
or
MACD = EMA [12] of price – EMA [26] of price. Signal line is what we call the second line that uses 9 period simple moving average of the previous line (MACD line). Signal = MACD – SMA [9] of MACD
Positive MACD indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. This positive momentum is considered bullish, in which we expect a rise in prices. On the other hand, negative MACD indicates that the rate-of-change of the faster moving average is lower than the rate-of-change for the slower moving average. And this negative momentum is considered bearish.
Therefore, we can say that the MACD indicator is Bullish and Bearish signals generator that used to forecast the market movement. The most used methods of MACD trading are moving average crossing, centerline crossing, and divergence. Traders use MACD to see indications of crossovers, which is regarded as the most significant signal to buy or sell. Traders use MACD to determine whether a particular currency pair is overbought or oversold. It is also used to indicate trend reversals. When the MACD and the currency price move into different directions from one another, it means there is trend reversal. Applications of Moving Average Convergence Divergence includes trend confirmation, measuring the strength of a currency pair, indicator of currency pairs being either overbought or oversold and indicator of reversals.
In summary, MACD chart has the ability to overshadow on trend change, which triggers the sell off or buy in signal. A negative divergence indicates a change of bullish trend to bearish. A positive divergence indicates a change of bearish trend to bullish. MACD is a very simple approach and is now often used together with other technical analysis. And remember that knowledge and right trading platform are the two things needed to be successful in Forex trading.
