What is Moving Average Convergence Divergence (MACD)?

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Moving Average Convergence Divergence (MACD pronounced Mac Dee) is one of the most reliable and simple tool in your trading arsenal as a currency trader. MACD is a trend following momentum oscillator or indicator.

MACD shows the relationship between two moving averages of recent prices. It is a lagging indicator. Most technical indicators are lagging which means they are slow. They just tell you what just happened after the fact.

Technical analysis is based on the belief that past prices can be used to predict the future prices in the currency markets. Learning technical analysis is essential for you as a currency trader.

Many chart types are used in the technical analysis. Technical analysis helps you to read your charts and analyze the price action with technical indicators. Learning how to use technical indicators is the key to understanding the market behavior.

MACD is calculated by subtracting a slow exponential moving average (EMA) like 55 from a fast exponential moving average like 21. Signal line is calculated by the taking the EMA of MACD for a number of bars like 8. The Histogram is the difference between the MACD and its signal line. 55 and 21 are the number of periods that you use.

MACD is one of the most popular technical indicators in currency trading and is used often. However, beware that MACD is often misunderstood and misused resulting in wrong signals. Like any other technical indicator you should use it in conjunction with other technical indicators for confirmation.

Crossovers: A crossover happens when MACD falls below or rises above the signal line. When MACD rises above the signal line from below, it is a bullish signal. It indicates that you should buy. Conversely, when MACD falls from above, it is a bearish signal. It indicates the time to sell.

Divergence: When the price diverges from MACD, it indicates the end of the current trend. Negative Divergence is when the price action is rising and MACD is falling. Both the price action line and the MACD line are diverging. It is an indication of the change in the currency trend. Thats right! The lagging indicator that is supposed to follow the price is predicting future behavior of the prices in the market.

Dramatic Expansion: Dramatic expansion occurs when the shorter moving exponential average pulls away from the longer moving exponential average. Suppose MACD expands dramatically. It is an indication that the currency is overbought/ oversold and may return to normal soon.

One thing should be very clear when you use a MACD. All the above three cases are important and should not be overlooked by you as a currency trader. However, none of them alone are signals for a trade. If you simply start trading on MACD Divergence, it may not yield a profitable trade. MACD Divergence is tradable when confirmed by other indicators.

However, when confirmed by other technical indicators, success is more likely. This is because of the fact that several things are happening at the same time. Each is attracting the same bulls and bears into the trade that you are planning to make. So you have to confirm your finding with other technical indicators.

When you use MACD, crossovers and dramatic rises are usually easy to spot. Even novices can do that. However, spotting MACD divergence correctly comes after a little practice.

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Try Netpicks Forex Signal Service.

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Hassam_, Ahmad "What is Moving Average Convergence Divergence (MACD)?." What is Moving Average Convergence Divergence (MACD)?. 12 Jun. 2009. uberarticles.com. 25 May 2012 <http://uberarticles.com/finance/currency-trading/what-is-moving-average-convergence-divergence-macd/>.

APA Style Citation:
Hassam_, A (2009, June 12). What is Moving Average Convergence Divergence (MACD)?. Retrieved May 25, 2012, from http://uberarticles.com/finance/currency-trading/what-is-moving-average-convergence-divergence-macd/

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Hassam_, Ahmad "What is Moving Average Convergence Divergence (MACD)?" uberarticles.com. http://uberarticles.com/finance/currency-trading/what-is-moving-average-convergence-divergence-macd/

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