Moving Average Convergence Divergence (MACD) Explained
Moving Average Convergence Divergence, acronym MACD and pronounced Mac Dee is one of the simple and most reliable technical tools in your trading arsenal as a currency trader. MACD is a trend following momentum oscillator or indicator and is used often by most of the traders.
MACD is a lagging indicators and it shows the relationship between two moving averages of recent prices. Most technical indicators used in technical analysis are lagging. This means they are slow and they just tell you after the fact what just happened.
Technical analysis is based on the belief that all available information is immediately impounded into the prices and the past prices can be used to predict the future prices in the currency markets. Learning technical analysis is must for you if you want to succeed as a currency trader.
Many chart types are used in the technical analysis. Technical analysis helps you to read your charts and analyze the price action with technical indicators. Learning how to use technical indicators is the key to understanding the market behavior.
MACD is calculated by subtracting a slow exponential moving average (EMA) from a fast exponential moving average. Signal line is calculated by the taking the EMA of MACD for a number of bars. The Histogram is the difference between the MACD and its signal line.
MACD is one of the most popular technical indicators in currency trading and is used often. However, beware that MACD is often misunderstood and misused resulting in wrong signals. Like any other technical indicator you should use it in conjunction with other technical indicators for confirmation.
Crossovers: When MACD falls below the signal line from above, it is a bearish signal. It indicates the time to sell. Conversely, when MACD rises above the signal line from below, it is a bullish signal. It indicates that you should buy.
In case of a Divergence, when the price diverges from MACD, it indicates the end of the current trend. Negative Divergence is when the price is rising and MACD is falling. It is an indication of the change in the trend. Thats right; the lagging indicator that is supposed to follow the price is predicting future behavior.
Dramatic Expansion: Dramatic expansion occurs when the shorter moving exponential average pulls away from the longer moving exponential average. Suppose MACD expands dramatically. It is an indication that the currency is overbought/ oversold and may return to normal soon.
One thing should be very clear. All the above three cases are important and should not be overlooked. However, none of them are signals for a trade. For example, MACD Divergence is tradable when confirmed by other indicators. If you simply start trading on MACD Divergence, it may not yield a profitable trade.
However, when planned in advance and confirmed by other technical indicators, success is more likely. This is due to the fact that several things are happening at the same time. Each is attracting the same bulls and bears into the trade that you are planning.
MACD crossovers and dramatic rises are easy to spot. However, spotting MACD divergence takes a little practice. - 23167
MACD is a lagging indicators and it shows the relationship between two moving averages of recent prices. Most technical indicators used in technical analysis are lagging. This means they are slow and they just tell you after the fact what just happened.
Technical analysis is based on the belief that all available information is immediately impounded into the prices and the past prices can be used to predict the future prices in the currency markets. Learning technical analysis is must for you if you want to succeed as a currency trader.
Many chart types are used in the technical analysis. Technical analysis helps you to read your charts and analyze the price action with technical indicators. Learning how to use technical indicators is the key to understanding the market behavior.
MACD is calculated by subtracting a slow exponential moving average (EMA) from a fast exponential moving average. Signal line is calculated by the taking the EMA of MACD for a number of bars. The Histogram is the difference between the MACD and its signal line.
MACD is one of the most popular technical indicators in currency trading and is used often. However, beware that MACD is often misunderstood and misused resulting in wrong signals. Like any other technical indicator you should use it in conjunction with other technical indicators for confirmation.
Crossovers: When MACD falls below the signal line from above, it is a bearish signal. It indicates the time to sell. Conversely, when MACD rises above the signal line from below, it is a bullish signal. It indicates that you should buy.
In case of a Divergence, when the price diverges from MACD, it indicates the end of the current trend. Negative Divergence is when the price is rising and MACD is falling. It is an indication of the change in the trend. Thats right; the lagging indicator that is supposed to follow the price is predicting future behavior.
Dramatic Expansion: Dramatic expansion occurs when the shorter moving exponential average pulls away from the longer moving exponential average. Suppose MACD expands dramatically. It is an indication that the currency is overbought/ oversold and may return to normal soon.
One thing should be very clear. All the above three cases are important and should not be overlooked. However, none of them are signals for a trade. For example, MACD Divergence is tradable when confirmed by other indicators. If you simply start trading on MACD Divergence, it may not yield a profitable trade.
However, when planned in advance and confirmed by other technical indicators, success is more likely. This is due to the fact that several things are happening at the same time. Each is attracting the same bulls and bears into the trade that you are planning.
MACD crossovers and dramatic rises are easy to spot. However, spotting MACD divergence takes a little practice. - 23167
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Try Netpicks Forex Signal Service.
posted by X - Men @ 3:15 AM
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