MACD

MACD




The MACD indicator is one of the popular indicators used in technical analysis, the MACD meaning is the Moving Average Convergence Divergence or (MACD) for short.

A new trader starting out on his/her trading career may ask, ‘can using the macd indicator help when trading forex?’ or ‘be one of the best forex indicators’ And that’s a reason to learn and understand about this powerful and useful indicator.

The indicator is used by a trader to look at momentum and trend direction.

MACD indicator

The MACD uses two Moving Averages of varying lengths (these are lagging indicators) to identify the trend direction and the duration, and then, indicator takes the difference in values between the two Moving Averages (MACD Line) and the EMA of the Moving Averages (Signal Line) and plots the difference between the two lines as a histogram which oscillates above and below a centre Zero Line.

The histogram is used as a good indication of a security’s momentum.

A break down each of the indicator’s three components.

The Signal Line: this is the EMA of the MACD and a trader can alter the period length to his/her specific choice but the most common being 9.

The MACD Line: this is taking a longer term EMA and subtracting it from a shorter term EMA,  the most common values are 26 days for the longer term EMA and 12 days for the shorter term EMA, but again a trader can alter the period length to his/her specific choice.

The Histogram: this is that difference between the MACD Line and Signal Line and plots it into a readable histogram. When the MACD histogram is above the Zero Line, traders consider the MACD to be positive and when it is below the Zero Line, traders consider the MACD to be negative.

If the MACD is negative and the histogram value is decreasing, then downside momentum is increasing and if the MACD is positive and the histogram value is increasing, then upside momentum is increasing.

MACD indicator

The Signal Line Crossover

A Signal Line (shown in the image as Orange) Crossover is a common signal produced by the MACD, it’s calculating the Moving Average of the MACD Line (shown as the blue line) so the Signal Line will lag behind the MACD line. however where the MACD Line crosses above or below the Signal Line, can signal a potentially strong move.

Bearish Signal Line Crossovers occur when the MACD Line crosses below the Signal Line.

Bullish Signal Line Crossovers occur when the MACD Line crosses above the Signal Line.

Zero Line Crossover

The Zero Line Crossover occur when the MACD Line crosses the Zero Line and either becomes positive (above 0) or negative (below 0).

Bearish Zero Line Crossover occur when the MACD Line crosses below the Zero Line and go from positive to negative.

Bullish Zero Line Crossover occur when the MACD Line crosses above the Zero Line and go from negative to positive.

Divergence

The Divergence is another signal created by the MACD divergence is when the MACD and the actual price are not in agreement.

Bearish Divergence occurs when price records a higher high while the MACD records a lower high.

Bullish Divergence occurs when price records a lower low, but the MACD records a higher low.

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