Using the MACD Indicator In Forex Technical Analysis

Thorough – and effective - Forex MACD technical analysis depends upon making use of a wide variety of indicators. No one strategy will predict Forex market swings all the time, but several are available that can help investors time trades. One very useful, if underused, tool is the Forex MACD indicator.

One look at the name indicates why the Forex MACD strategy, or Moving Average Convergence Divergence, is not used as often as it should be, especially by beginning investors. It sounds complex, it sounds intimidating, and it sounds unapproachable. It is worth taking some time to discover how Forex MACD works, though, because it is a powerful addition to any sound investment strategy.

The Forex MACD indicator, along with stochastic, and RSI help investors anticipate emerging trends. Moving in on trends early is essential for expanding profits. Forex MACD shows investors how two moving averages are related so they can determine upcoming trends.

Settings

Reading Forex MACD indicators can take some getting used to. You will see three numbers: 12, 26, and 9 are commonly used. These are known as the settings. Other settings may be used, but 12, 26, 9 is the standard.

The Forex MACD strategy hinges on reading these indicators correctly. Many assume that the first number in the setting refers to the faster moving average line, the second to the slower moving average line, and the last number to the histogram, or summary of data, at the bottom of the MACD chart. While common, this is not entirely accurate.

Using the common settings of 12, 26, 9, recommended by creator Gerald Appel, 12 and 26 are used to designate the number of days that are used to compute two moving averages. To arrive at the faster moving average line, the difference between the 12-day period and the 26-day period moving averages are measured (this is expressed as EMA[12] – EMA[26] = MACD). This is usually shown in green on the chart.

The slower moving average line shows the average movement of the last 9 periods of the faster moving average line, to continue with the 12, 26, and 9 setting. This is typically shown in red on the chart and has less dramatic peaks and valleys. It smoothes the faster moving average line.

Divergence And Convergence

At the bottom of the chart is a histogram, which appears as a series of blocks on an axis. This shows the convergence and divergence of the faster and slower moving average lines; more simply, it shows where they come together and where they grow apart.

When the blocks on the histogram are longer, this indicates that the two moving average lines have diverged. When the blocks are shorter, this tells the investor that they have converged. If the blocks are above the line when the lines should cross, the blocks will then switch to below the line. Conversely, if the blocks are below the line and the lines cross, they will stretch above.

The Forex MACD chart and histogram show how the faster moving average line and the slower moving average line converge or diverge, hence the name Moving Average Convergence Divergence or Forex MACD indicator.

Here are some great sources for furthering your Forex Education:

1. Forex Trading Made EZ (Easy)

2. Forex Mentor by Peter Bain

3. Forex Profit Accelerator by Bill Poulos