The Moving Average Convergence/Divergence (MACD)

The Moving Average Convergence/Divergence (MACD) is a versatile indicator. Moving Average Convergence/Divergence is one of the simplest and most reliable forex indicators. MACD will help you identify both the bull divergence as well the bear divergence which are rare but macd effective patterns.

This is a hybrid tool that is helpful in determining the present market direction as well as measure the price momentum. Many traders use MACD as their sole confirming indicator. This multi faceted indicator acts as a sign of the trend momentum by representing the relationship between the two moving averages.

MACD line is the difference of two exponential moving averages. Another line is plotted alongside the MACD line and that is the exponential moving average of MACD itself.

The default settings for MACD are the 12 EMA, 26 EMA and the 9 EMA. MACD is the difference of 26 EMA with the 12 EMA. This line is plotted as the black line. Another line that is usually grey is also plotted alongside this main MACD line and it is the 9 day EMA of MACD.

The change of the two moving averages either closer to or further away from each other have predictive value. As the two moving averages approach each other in value, a potential crossover maybe forming. This means the current trend is losing momentum by slowing down and the market may be getting ready for a trend change. Similarly, as the trend strengthens, the two moving averages grow further apart indicating an increase in momentum.

MACD chart comprises of a histogram in addition to the line chart. The MACD line is colored dark and usually is black while the trigger or the signal line is colored light usually grey. When these two lines come close, it indicates the weakening of the trend and when they move further apart, it means the trend is gaining strength.

The Histograms shows the variations in the distance between the two fast moving and the slow moving lines. The histograms measure momentum. When the bars are moving away from zero, this is taken as positive momentum. When these bars move towards the zero line, this is interpreted as a decreasing momentum. Positive momentum means the current trend is strengthening whereas negative momentum means the current trend is weakening. These were the basics of MACD. In the next article, we will discuss how the buy and sell signals are generated with the MACD.

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