MACD – What Is The MACD Forex trading indicator?
January 31, 2010 by Roman Veaila
Filed under Currency Trading
The MACD is a forex indicator that uses two moving averages. The full name of this indicator is Moving Average Convergence Divergence. This indicator is extensively employed in the forex trading business.
There are two most important uses of utilizing the MACD indicator, trend identification along with market momentum. This offers the trader two important pieces of data simply at a glance. To produce this tool, a 12 period (EMA) and subtracting its 26 period exponential moving average.
This indicator is to be found beneath the price charts where it fluctuates over and beneath a center line that is given the value of zero. Another line created by a nine period line is also plotted on the indicator window. This is known as the signal line.
Should the indicator line cross above the zero center line, the trader knows that the 12 ema has crossed higher than the 26 ema. If the MACD crosses under the center line, this simply means the 12 ema has also crosses below the 26 ema. This indicator is actually just a cross over technique based on moving averages. Should the indicator trade over the center line, the markets are viewed as possessing bullish momentum.
Should it drop below zero, this is an indication that market movement is bearish instead. As a added confirmation of whether the markets are bullish or bearish, the signal line is used. So we are concerned with two crossovers. A cross above the center line as well as a cross over the 9 period MACD signal line.
There is an added tool that can be employed with the double cross over. It is called the histogram. The markets are bullish if the histogram expands upwards in addition to the markets are bearish if it starts expanding downwards. This is just another confirmation signal for the forex trader.
Like all trend indicators based on the moving average, the MACD gives false signals in a side trending market. Generally, if the indicator is trading next to the zero line, this is an signal the market is side trending.
Should the indicator begins trending in a direction opposite to the price, this can be utilized as a sign that the markets may encounter a reversal shortly as the trend is losing momentum.
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