MACD Indicator for Forex Trading

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MACD Indicator for Forex Trading

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MACD Indicator for Forex Trading
In Forex Trading, MACD or Moving Average
Convergence Divergence is considered one of the
most potent technical tools used by traders. The
indicator is generally used to check the
direction as well as the strength of a trend and
to define reversal points. 
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As indicated in the chart above, there are
usually three numbers that are used as part of
its setting.

• The first number is the required period used to
  calculate the faster moving average.
• The second number is the required period used to
  calculate the slower moving average
• The third number indicates the number of bars
  which are used to calculate the moving average
  after subtracting the slower moving averages from
  the faster ones. 

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Using MACD in Forex Trading
Traders are provided several types of signals
when using MACD, some of these are
overbought/oversold levels, centerline
crossovers, zero line crossovers and divergences.
Its a general rule that the market is said to be
bearish when the MACD is below 0 and bearish when
it is above 0.  
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1.Overbought/Over-sold levels
As indicated in the above diagram, the bigger the
divergence between the two moving averages, the
higher the probability of the price correction
that would allow the MACD to return back to 0. 
Traders can thus trade the extreme highs and lows
of the MACD, as it signifies that the market is
either overbought or oversold. Traders should
judge extremes by studying the comparison of the
MACD levels. Such signals require a confirmation
from technical indicators such as price action.
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2. Zero-line Crossovers 
Zero line crossovers are of two types, bullish
and bearish.  A Zero line crossover is bullish
when the MACD moves above the 0 level and turns
positive. Traders use it as a confirmation of an
uptrend. On the other hand, a zero line crossover
is considered bearish, when the MACD drops below
0 and turns negative. This is usually used to
confirm the downtrend. 
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2. Zero-line Crossovers 
In the above chart, the MACD gives similar
trading signals as a two moving average system
does.  Traders can use a strategy where they can
buy when the MACD rises above the 0 level and
sell when the MACD falls below the zero level. It
should be noted that this approach is profitable
only in the presence of strong trends,
implementing this during a volatile sideways
market, can result in losses. 
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3. Signal Line Crossovers 
Signal Line crossovers are also either bullish or
bearish, A bullish crossover occurs when the MACD
increases and goes above the signal line.
Similarly, it is called bearish when the MACD
starts declining, crossing the signal line
towards the downside. 
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3. Signal Line Crossovers  
The MACD produces favorable results in trends
that have a narrow price range. Traders can thus
establish a trend, using only those MACD signals
which fall in line with the trend.  Thus, in the
figure above, its clear that only negative MACD
crossovers should be traded when in a downtrend
with the signal line.  
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4. Divergences 
Divergence and convergence can also be used to
trade. Traders should pay attention to divergence
and convergence between the price and the
indicator. A convergence is said to be bullish
when the price sets lower lows and the minimums
of the MACD histogram are higher. A bearish
divergence occurs when the price renews the
highs, all the while as the MACD maximums become
the sell signal. 
The MACD is both a trend as well as a momentum
indicator. It is a very useful technical
indicator that produces a variety of signals,
forming the basis of a solid foundation in any
trading system. 
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