MACD Chart In Currency Trading
Reading on Forex Black Panther made me read up on some indicators. The MACD chart for example, is routinely shown below the candlestick chart and provides helpful forex trading indicators. MACD stands for Moving Average Convergence-Divergence. As the name suggests, it shows the convergence (coming together) or divergence (moving apart) of two exponential moving averages, one of which is fast and the other slow.
The indicator was designed by a Big Apple stock researcher named Gerald Appel in the 1970s. Designed for the stock market, it nonetheless can be applied very well in other markets including forex trading.
On the MACD chart you’ll see 2 lines. One tracks the average of the difference between the two moving averages mentioned. Example settings for those might be twelve and twenty-six period moving averages. The other line on the chart is an exponential moving average of the MACD line itself, with a typical setting of nine. This is used as a signal line.
There are two simple methods to use the MACD. The first is to open a trade on the crossover of the 2 lines. If the quicker line ( the signal line ) crosses the other from above, that may be treated as a signal to purchase. If it crosses from below, that may be a signal to sell.
This can form the foundation of a straightforward foreign exchange trading system which can be refined by checking the MACD in a second time frame. As an example in day trading, look for the crossover on an hourly or 30 minute chart before moving in to the shorter time frame to make the trade. Then watch the higher timeframe again for a signal the trend is ending.
It is generally best to consult the higher time frame first when trading on the premise of this indicator. This helps to forestall Problems due to trading against a longer term trend.
MACD may also be used to show overbought and oversold markets. When both lines are noticeably above 0, the market can be said to be overbought. When they both fall significantly below nil, it is oversold.
The chart also includes a histogram giving a visual evidence of convergence or divergency between the 2 lines. If the histogram is growing smaller, the lines are coming together. This may indicate a crossover is approaching. The histogram is at 0 when crossover occurs.
MACD is a lagging indicator and is prone to whipsaws when the market changes. Traders can be badly caught out. This is very true in the stockmarket where traders are relying less on the MACD nowadays. The MACD chart is still a helpful supplier of trading signals in numerous other markets, including forex.
