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.

How to use the Stochastics indicator: The Forex Market

What is the stochastics indicator?

Stichastics is an oscilating indicator very commonly used in technical analysis. George Lane, the developer of this indicator, applied it for the first time in the late year 1950s and early 1960s.

This indicator is measured on a scale from 0% to 100% and determines the deviation of the closing price on the market, compared with normal levels of a period set by the trader. It is important that you know that this indicator is not recommended to be used in trending markets, since it is less effective.

Using the stochastics indicator

The main idea of how the stochastics indicator works is that you need to see clearly how this indicator determines what’s going to happen in the market; an upward or downward trend, by looking specifically at the cross of the two indicator lines.

You can use this metric to calculate the levels of overbought / oversold levels (using the RSI indicator), also for finding entry points at the intersection of lines and moving averages of the market direction and to identify divergence points, with the aim of providing some weakness in the market.

This indicator is composed of two lines:

1. The main line is called: % K
In the main fluctuation line (% K) tends to be more distinguished than the secondary line (% D), because it is more sensible. This is represented in the graphs as a compact line.

2. The secondary line is called: % D
% D is the moving average line of % K line. It’s represented in the Forex graphs as a dotted line.

There are 3 types of stochastics: Slow indicator, fast indicator and full indicator.

1. Fast Stochastics: Line % K is not uniform, so it will not show any moving average. This type tends to provide an early indication of a turnaround in the trend of the market.

2. Slow Stochastics: Contrary to the fast % K line it is a bit more uniform, using three periods moving averages of the values of the line % K, so it is called a Fast Stochastics derivative. This type of stochastics provides more reliable trading signals.

3. Full stochastics: Allows you to use the two lines: % K and % D.

As in other indicators, it is suggested that you make reference to the two lines between 20 and 80. These lines will serve to highlight potential overbought levels (above 80%) and oversold levels (below 20% to trade in Forex.

The stochastics indicator provides 3 types of signals for trading in the Forex market:

1. Overbought/ Oversold: This signal occurs if the line passes over stochastics line of 80% and then the indicator goes back to the middle zone; the market should move in the same direction, which means a movement downwards. The same occur when the stochastics line passes below the line of 20% and then the indicator goes back to the middle zone; so the Forex market should move in the same direction which is an upward movement.

What traders should do? You must wait until the crossing is given between the lines to confirm the signal before you can take an action.

2. Crosses: This signal occurs if the two lines cross the upper zone (above 80% mark) and then, the indicator goes back to the middle zone; the market should move in the same direction, which means a movement downwards. The same thing happens when two lines crosses the lower zone (below 20% mark) and then the indicator goes back to the middle zone; so then the market should move in the same direction which is an upward movement. These moments are regarded for traders as the strongest signals.

What can we do? In this case you should sell at the intersection of the lines % K and % D when they are above the mark of 80% and buy at the intersection of the lines % K and % D, when it is below the line of 20%.

3. Divergences: It is considered the most important signal because it can be useful for confirming signals.

It is divided into:

• Bearish Divergence: This signal occurs when new high levels or new maxim levels appear and tend to go higher in the market and their corresponding peaks are progressively smaller. This is a potential sell signal.  I.e. Price continues to move up but stochastic indicator fails to do so

• Bullish Divergence: The bullish divergence occurs when the market shows new consecutive and new low levels, and the corresponding minima are progressively larger. This may be a possible buy signal. I.e. Price continues to move lower, but stochastics indicator fails to do so.

What to do? In this case, you, as a trader, must sell a bearish divergence and buy if it is a bullish divergence.

What you should NEVER do?

• Never buy or sell unless both lines cross.

• Never buy or sell, if you find crosses in the boundary lines marked or in the middle of the two limits.

• Do not use this indicator in markets with fluctuant trends.

Remember that no investment is risk free and a stochastics indicator in Forex will help you most effectively when it is used in conjunction with other tools and indicators.

If you would like to have more information about this Indicator, Please click here: Forex Indicators