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MACD - Moving Average Convergence/Divergence Forex Technical Analysis and MACD Forex Trading Signals

Developed by Gerald Appel,

 

The Moving Average Convergence/Divergence is one of the simplest, reliable, and most commonly used indicators.

 

It is a momentum oscillator and also a trend-following indicator.

 

Construction

The construction of this indicator calculates the difference between two moving averages and then plots that as the "Fast" line; the a second "Signal" line is then calculated from the resulting "Fast" line and then plotted on the same panel window as the "Fast" line.

  • "Fast" line – Blue Line
  • "Signal" line– Red Line

 

The "standard" MACD values for the "Fast" line is a 12-period exponential moving average and a 26-period exponential moving average and a 9-period exponential moving applied to the fast line, this plots the "Signal" line.

  • Fast line= difference between 12 and 26 exponential moving averages
  • Signal line= moving average of this difference of 9-periods

 

MACD indicator - Momentum Oscillator Forex Trading Indicators

 

 

Forex Technical Analysis and Generating Forex Trading Signals

The MACD is commonly used as a trend-following indicator and works most effectively when analyzing trending market movements. The three common methods of using MACD to generate signals are:

 

Crossovers Signals:

Fast line/Signal line Crossover:

  • A buy signal is generated when the Fast line crosses above the Signal line
  • A sell signal is generated when the Fast line crosses below the Signal line.

However, in a strong trending market this signal gives a lot of whipsaws, the best crossover to use would thus be the Zero Line Crossover Signal that is less prone to whipsaws.

 

Zero Line Crossover Signals:

  • When the Fast line crosses above zero center line a buy signal is generated.
  • when the Fast line crosses below zero center line a sell signal is generated.

 

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Divergence Trading:

Looking for divergences between the MACD and price can prove to be very effective in identifying potential reversal and/or trend continuation points in price movement. There two types of divergences:

  1. Classic Divergence Signals
  2. Hidden Divergence Signals

 

Overbought/Oversold Conditions:

MACD is also used to identify potential overbought/oversold conditions in price action movements.

These levels are generated if the shorter MACD Lines separate dramatically from the median, this is an indication that price action is over-extending & it will soon return to more realistic levels.

 

MACD and Moving Average Crossover System

This indicator can be combined with others to form a Forex trading system. A good combination with the Moving Average crossover system. A trading signal is generated when both give a signal in the same direction.

 

Technical Analysis of MACD Technical Indicator

Technical Analysis

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EURUSD: as low as 0.1 pips
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Commission reduced from $5 to $3.5 per side

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