Currency Indicators : Using The MACD Indicator

Moving Average Convergence Divergence indicator or MACD for short is one of the most desired FX chart tools. Two critical utilities for this is to provision a check when employing other methods or as a stand alone indicator.

The MACD chart measures faster and slower moving averages and whether they are reaching closer together (converging) or farther apart (diverging).

When they are converging you will see the two lines on the chart moving closer to each other and the bars on the histogram at the bottom of the chart turn smaller. This means that the present movement is either climaxing

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The faster line by default has a rapid reaction to price movements relative to the slower line. Thus during the creation of a new trend, the faster line will advance and in the course of time intersect the slower line. Usually, a departure or divergence from the slower line signfies the creation of a new trend.

Upon their intersecting, bars on the histogram are on zero after which they reverse their axis advancing below if they were on top, and above if they were below. A rapid amplification of the bars are barometers that novel and vehement trend is now forming.

Therefore this crossover could be made use of as a signal to place an order. You have a buy signal when the faster line crosses the slower line from below, and a sell signal when it crosses from above.

That said, there are some considerations that may render the MACD and the crossover faulty as a stand alone alert. Since it surveys averages of historical prices, the fast line is naturally moving well behind the current market prices. As a result, in a market characterized by unpredictability, the MACD could be just announcing the beginning of a trend that has already ended in truth.

forex ambush
In general, the MACD is excellent as trend strength indicator rather than a direction indicator. Thus a number of traders would neglect the crossover and concern themselves with assessing the length of the bars. That said, it is imprudent to use divergence as a signal to buy and to depart on the basis of an unfortunate price movement.

blade forex
If you are just starting out in Forex trading, you are perhaps better suggested to prop your trading decisions on other indicators on FX charts and turn over to the MACD only for background.

Note: FX investing is speculative, may result in substantial losses, and is not suited for everybody.

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