MACD - Moving Average Convergance Divergance
- Bollinger Bands
- Fibonacci Retracement
- MACD
- Moving Average
- Exponential Moving Average
- Simple Moving Average
- RSI (Relative Strength Index)
- Stochastic
The MACD is a forex indicator that is based on the moving average. It stands for Moving average convergence divergence. It is a fairly popular indicator in the forex trading business.
The advantages to using MACD over regular moving averages is that it gives forex traders an indication of market trends as well as market momentum. Which gives additional information to the viewer at a glance.
The MACD indicator is created by taking a 12 period Exponential Moving Average (EMA) and subtracting its 26 period exponential moving average.
This indicator is placed below the price charts where it fluctates above and below a center line that is given the value of zero.
A nine period MACD line is also plotted along with the original line. This is known as the signal line.
When the MACD line is above zero, this tells the trader that the 12 EMA is trading above the 26 EMA. Conversely, if the MACD is below zero that means that the 12 EMA crossed below the 26 EMA line.
In essence, this indicator is a moving average cross over system. When the indicator rises above zero this is seen as bullish momentum to the forex trader. Should it drop below zero, this is an indication that market movement is bearish instead.
The purpose of the signal line is to further confirm bullish or bearish momentum. So we are dealing with two crossovers. A cross above the zero value and a cross over of the signal line.
The MACD has a third indicator that can be used in conjunction with the zero value and signal line cross over. This is known as the MACD histogram.
Should it expand above the zero value, the market is bullish and should it expand below zero, the markets are bearish. This is just another confirmation signal for the forex trader.
The MACD is a trend indicator which means traders should avoid using it when the market is side trending. Usually, if the indicator is trading near the zero line, this is an indication the market is side trending.
Should the MACD begin trending in a direction opposite to the price, this can be used as a sign that the markets may experience a reversal soon as the trend is losing momentum.