WHAT IS MACD INDICATOR? HOW DOES IT HELP YOU IN FOREX TRADING?
One of the most common indicators in the forex market is the MACD indicator. What is an indicator you’re asking? Well, in forex trading, we make money by basically predicting the trend of a certain currency. Indicators are systems that can predict it for us automatically. Today, we will focus on this very common indicator, the MACD indicator. We will tell you what it is and what it does to help you in forex trading so that you can add this indicator to your platform.
What is MACD indicator?
MACD is short for Moving Average Convergence Divergence. It is a tool for identifying how much a currency will move on average, both increasing and decreasing.
Many traders really like this indicator, if not obsessed with it. With the MACD technical indicator, there are three figures to set.
- The first is the time period parameter used to calculate the fast moving average (Fast EMA).
- Next is the number of time periods used to calculate the slow moving average (Slow EMA).
- And finally, the number of bars is for calculating the average difference between the fast and slow moving average, the MACD SMA.
If you're new to forex trading, you have to read:
- What is forex trading strategy
- 5 forex trading tips that can boost your profile
- Position trading - An excellent trading strategy in forex
I have set those 3 figures as 12, 26, and 9.
- Fast EMA Period: shows 12, significant mean of the average price of the previous 12 sessions.
- Slow EMA: displays 26, which is meant to mean the average price of the previous 26 sessions.
- MACD SMA: displays 9, which is meant to represent the difference between the two average values over the previous 9 sessions, drawn by vertical lines called bar charts (black bars in the figure below).
Looking at the picture above, the fast moving average is the moving average of the difference between the 12 and 26 moving averages.
The bar chart (black bars) shows the difference between a fast and slow moving average line. When the two moving averages move apart, the corresponding columns will be higher and vice versa.
So it is called divergence due to the split of the faster moving average from the slower moving average or it will move entirely away. Conversely, as the space between the moving averages slowly shrinks, the frequency statistics chart becomes smaller. Traders call this phenomenon convergence because the faster moving average is converging or approaching the slower moving average. This has great affects on your major key forex strategy.
What rold does MACD indicator play in your strategy?
The MACD indicator is very suitable for the Price Action trading strategy.
We need to note this, because there are two different moving averages at different speeds, the Fast EMA and the Slow EMA, so when there is a price movement, the Fast EMA will react. It is faster than the moving average. The Slow EMA is slower than it is called.
And when new trends are forming, the faster Fast EMA will respond first and cross the Slow EMA. And then a crossover will occur, and the faster Fast EMA starts to detach or move away from the Slow EMA, and it often indicates that we are about to witness a new trend.
- A buy signal occurs when the MACD crosses above and above the signal line.
- When the MACD histogram is below the zero line and begins to converge to the zero line.
- Or when divergence occurs between price and MACD line, the price continues to fall with the lower low, and the MACD increases with the higher low.
In stark contrast to buy signals, with sell signals we also have the following:
- A sell signal occurs when the MACD crosses below and below the signal line.
- In case the MACD histogram is above the zero line and begins to converge to the zero line.
- Or when divergence occurs between price and MACD line. In particular, the price continues to rise with the higher high of the previous peak, and MACD is lower with the lower high.
Now you can see why many traders are fond of this MACD indicator. It is a very common indicator and safe to use. If you know how to use it and have discipline, the effects it brings you are beyond question.