The MACD is a technical indicator that was developed by Gerald Appel in 1979. Appel used the abbreviation MACD which is the acronym for moving average convergence divergence. This is a trend following indicator, meaning that it will follow the trend of the market and not necessarily predict the direction.
This is one of the most popular trend-following indicators because it’s easy to understand, simple to use, and works well most of the time. This blog will discuss the ins and outs of the MACD and how it can be used to trade forex.
What is MACD?
Moving average convergence divergence is the oscillator to measure the direction and momentum of the price trends. It is used to indicate a new trend, and it can be bullish or bearish. If you are able to find the trend, you can make a lot of money. Many traders use Moving average convergence divergence to find the right trend and appreciate the tool because of its flexibility.
People also count MACD in the list of lagging indicators. A lagging indicator is a factor that confirms the long trends and changes in them. But it does not predict the trends. Moving average convergence divergence is a great tool to measure the price within the forex market. You can find the duration of the trend by using this efficient tool.
Traders should be aware of the fact that technical analysis could help them in so many ways to develop their trading career and create more chances to earn higher returns. You can easily access the Moving average convergence divergence with a well-established forex broker like InvestFW and InvestBy along with other important technical indicators.
Can MACD be used in forex?
Moving average convergence divergence is an abbreviation for Moving Average Convergence Divergence. It is a technical analysis indicator that is used to gauge the strength and direction of a financial asset’s momentum. It is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.
A 9-period EMA of the Moving average convergence divergence called the “signal line”, is then plotted on top of the Moving Average Convergence Divergence line, which can be used as a trigger for buy and sell signals. Moving Average Convergence Divergence is considered a lagging indicator because it is based on past prices.
How to Trade Forex with MACD?
MACD can be used in every situation, whether a currency pair is traded in an uptrend or downtrend. When the forex currency pair is traded sideways also, you can use the tool. The method is not as complex as other ones. But when using it, you need to be very careful in case of identifying the trade strength. MACD is the most popular tool that one can use in the forex market to analyze the rise and fall in the market.
It requires effort to make money from your investments, and you can make that effort worthwhile by using Moving average convergence divergence. One of the most important factors is that MACD is a well-known analytical tool to maintain the strategy while trading. Therefore, you do not need to depend on anybody if you are using this tool.
There are three key components of Moving average convergence divergence – EMA, histogram, and point of the reference line. You can see exponential moving lines in two colors. One color shows the fast Moving average convergence divergence line, and the other one shows the slow MACD line. If the value comes above the point of the reference line, it indicates the buy signal, and if it comes below the line, it will be the sell signal.
The fast line represents the 12-day period, and the slow line represents the 26-day period. Thus, the difference between two EMA lines is moving average convergence divergence. In addition, traders calculate the 9-day period EMA by already derived Moving average convergence divergence value. The line is then plotted on the chart to identify the buy and sell signals. Moving average convergence divergence software uses these three EMAs with default settings of 26, 12, and 9.
Histogram
The length of the Moving average convergence divergence histogram determines price momentum. As a result, MACD Indicators have a tendency to lag price changes. On the MACD Histogram, there is an apparent increase in the difference between the MACD and the Signal line. Again, the trader should visually check this signal, and it works best when combined with other trade settings. The indicator would then identify divergences based on this.
On both price action and the Moving average convergence divergence line, this indicator detects critical peaks and dips. In most cases, a change in the MACD Histogram precedes any changes in the signal, and the histogram signals might show trend changes earlier than the Moving average convergence divergence signal. It draws lines below the price to offer a bullish divergence and above it to show a bearish divergence.
Hidden divergence is shown by dotted lines, while a regular divergence is represented by solid lines. The Moving average convergence divergence Histogram’s rapid growth indicates that its value increases faster than the 9-day EMA’s, indicating that the bullish momentum is strengthening. A rapid fall in the MACD Histogram, on the other hand, suggests that the value is decreasing faster than the 9-day EMA’s value, indicating that the bearish momentum is strengthening.
The traditional Moving average convergence divergence approach relies on the MACD line and the signal line crossing over, validated by the positive and negative histogram bars shifting or vice versa. The second approach would be to use divergences. This would be based on the indicator’s arrow signals as well as the indicator’s determined divergence lines.
Calculation of MACD
The Moving average convergence divergence indicator is a line that depicts the difference between two moving averages. If Moving average convergence divergence provides you with solid entries, you can almost certainly discover other indicators to assist you in finding the most significant exits. For example, the 12-day EMA will be above the 26-day EMA in a bullish Moving average convergence divergence.
A short 9-day EMA of Moving average convergence divergence is drawn alongside the Moving average convergence divergence on the chart to operate as a trigger indicator in the standard form of the Moving average convergence divergence indicator. This is bullish because the quicker moving average’s rate of change is higher than the slower moving average’s rate of change.
The MACD indicator calculates the difference between two EMAs. The difference between the EMA of the 26-day period and the 12-day period is widening if the Moving average convergence divergence is positive and rising. When the Moving average convergence divergence line crosses the 9-day trigger EMA, it gives a purchasing signal.
Once you understand how to compute moving averages, building a Moving average convergence divergence is pretty straightforward. The reverse, in turn, yields a sell signal. However, it’s vital to remember that an indication that shows substantial inputs rarely shows good departures.
Advantages and disadvantages of the forex market
Advantages
- For added clarity, MACD can be used in conjunction with other technical approaches. The Moving average convergence divergence indicator generates two types of signals: the strength of the trend and the trend’s turning points. Using the Moving average convergence divergence crossover and divergence, it delivers distinct buy and sells signals.
- The trend’s strength is declining, and the possibility of a trend change is increasing, as the Moving average convergence divergence indicator stops rising or levels out. The MACD indicator can be used as both a trend and a momentum indicator.
- You can quickly identify the short-term momentum using the Moving average convergence divergence indicator. One of the main benefits of MACD is that you can efficiently time your trades. It’s all about the time you enter or exit the trade. Your profit and losses are dependent upon it. You can gain higher returns as fast you spot the price momentum.
- Moving average convergence divergence helps you to identify patterns before the momentum comes in your way. So it would be pretty beneficial for traders as they have an add-on advantage to strategize their trades correctly. The indicator can be used easily, quickly, and efficiently, making it one of the best indicators to identify the price trends and have an excellent grip on the market.
- Various signals given by this tool can be easily interpreted, which provides you with an edge in the market. You better take care of the things which are essential for your trading journey. And technical indicators are the added advantage to make your journey more profitable as they are on the side of technological advancement for the whole trading universe. Moving average convergence divergence is one of those indicators, and you can easily use it to diversify your portfolio by investing in various assets and instruments.
- You can get a precise analysis of the market conditions by using the Moving average convergence divergence tool. It helps you to understand the current trends of several international markets and trade accordingly. Moving average convergence divergence also gives you the liberty to customize your trading timeline. To get better with your technical analysis, you customize your timeframes with Moving average convergence divergence. The standard timelines are 12-day and 26-day periods.
- You can ensure that the short-term trading direction is moving in your favor by using the Moving average convergence divergence tool.
Disadvantages
- The MACD, like other trend-following and trend-confirming indicators, is prone to producing misleading signals on occasion. It has the potential to make misleading reversals. The Moving average convergence divergence, for starters, is a short-term indicator. The longer-term EMA of 26 days is the longest measurement method that is used.
- It’s advisable to validate a crossing before initiating a position to avoid being fooled by modest changes that aren’t indicative of larger trend shifts. The Moving average convergence divergence, like other technical analysis systems, has its drawbacks. As a result, Moving average convergence divergence is unable to predict all reversals.
- The Moving average convergence divergence is a trend following indicator as written. Many times, Moving average convergence divergence does not provide an accurate analysis of a trend. Before a trend reversal, trend following signals may fail or produce minor movement.
- Because it delivers varied signals, the Moving average convergence divergence is a useful technical analysis indicator. It could indicate that the trend is taking a break or moving sideways before continuing. The Moving average convergence divergence may provide reversal signals, although this does not always imply a significant reversal.
- The Moving average convergence divergence indicator’s fifth disadvantage is the time at which it produces its indications. Waiting for the trend to continue in the same direction or consulting additional trend indicators to find a long-term pattern are standard methods of confirmation. This means that the indications will appear after the trend has already begun. Other strategies may be more effective in spotting a developing trend.
Bottom Line
The MACD can be deceived by the volatility of the underlying security, causing it to move in odd ways. Be cautious before acting if the signal line crosses over at either extremely high or extremely low places. Make sure to reference other trend-confirming tools and momentum indicators when utilizing the Moving average convergence divergence to trade divergence or determine trend direction to avoid acting hastily on erroneous signals.
Similarly, if a crossing appears to be shallow, or if it seems to move up or down but then plateaus, be cautious but don’t make a hasty decision. Traders utilize the moving average convergence divergence indicator to assist them in determining entry and exit locations. It can be incredibly useful and dependable in certain instances.
