Using Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence, acronym MACD and pronounced Mac Dee is one of the simple and most reliable technical tools in your trading arsenal as a currency trader. MACD is a trend following momentum oscillator or indicator and is used often by most of the traders.

MACD is a lagging indicators and it shows the relationship between two moving averages of recent prices. Most technical indicators used in technical analysis are lagging. This means they are slow and they just tell you after the fact what just happened.

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

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) from a fast EMA. Signal line is calculated by the taking the EMA of MACD. The Histogram is the difference between the MACD and its signal line.

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.

In case of Crossovers, when MACD falls below the signal line, it is a bearish signal. It indicates the time to sell. Conversely, when MACD rises above the signal line, it is a bullish signal. It indicates that it may be time to buy.

In case of a Divergence, when the price diverges from MACD, it indicates the end of the current trend. Negative Divergence is when the price is rising and MACD is falling. It is an indication of the change in the trend. Thats right; the lagging indicator that is supposed to follow the price is predicting future behavior.

When MACD expands dramatically, this happens when the shorter moving average pulls away from the longer moving average. 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 planned in advance and confirmed by other technical indicators, success is more likely. This is due to 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.

When you use MACD, crossovers and dramatic rises are easy to spot. However, spotting MACD divergence comes after a little practice.