MACD Indicator In Forex Trading
After reading on Forex Black Panther made me read up on some indicators. The MACD chart as an example, is usually shown below the candlestick chart and provides useful currency trading indicators. MACD stands for Moving Average Convergence-Divergence. As the name implies, it shows the convergence (coming together) or divergence (moving apart) of two exponential moving averages, one being fast and the other slow.
The indicator was invented by a Big Apple stock researcher named Gerald Appel in the 1970s. Designed for the stock market, it nevertheless can be applied very well in other markets including forex trading.
On the MACD chart you’ll see two lines. One tracks the average of the difference between the 2 moving averages mentioned. Example settings for those might be 12 and 26 period moving averages. The other line on the chart is an exponential moving average of the MACD line itself, with a typical setting of nine. This is utilized as a signal line.
There are two simple paths to use the MACD. The 1st is to open a trade on the crossover of the two lines. If the speedier line ( the signal line ) crosses the other from above, that may be treated as a signal to purchase. If it crosses from below, that can be a signal to sell.
This may form the root of an easy currency trading system which can be refined by checking the MACD in a second time frame. As an example in day trading, keep an eye open for the crossover on an hourly or thirty minute chart before moving in to the shorter time frame to make the trade. Then watch the higher time-frame again for a signal the trend is finishing.
It is always best to consult the higher time-frame first when trading on the basis of this indicator. This helps to prevent issues due to trading against a longer term trend.
MACD can also be used to point out overbought and oversold markets. When both lines are noticeably above 0, the market may be said to be overbought. When both fall seriously below nil, it is oversold.
The chart also incorporates a histogram giving a visual proof of convergence or divergency between the two lines. If the histogram is growing smaller, the lines are coming together. This can indicate a crossover is approaching. The histogram is at zero when crossover occurs.
MACD is a lagging indicator and is susceptible to whipsaws when the market changes. Traders can be badly caught out. This is especially true in the stockmarket where traders are depending less on the MACD nowadays. The MACD chart is still a useful supplier of trading signals in many other markets, including foreign exchange.
