Forex Beauty Kit

MACD – Moving Average Convergence Divergence


Jul.19.2013

The MACD technique helps you identify where a trend starts and helps you confirm a buy or sell entry. Let’s start with pronunciation. You can call this indicator either Mac-D, Mc- D, M-A-C-D, or the way the Japanese pronounce it, Makku-D. Interesting to know that the Japanese also pronounce McDonald's in the same way. They like to shorten stuff. Getting hungry yet? Just to clear things up, MACD is not an abbreviation for McDonald’s. It actually stands for moving average convergence-divergence.

 

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MACD is one of the simplest and most famous momentum indicators in your forex beauty kit. “What is momentum?” you may ask. Momentum is the speed at which the price moves over a certain time period. Just like many other indicators in your forex beauty kit, moving average convergence-divergence can also be used to identify buy or sell signals. As you can see, there are many ways you can confirm a buy or sell signal before you place a trade.

“So what is MACD?” you ask. Simply put, it is an indicator that shows the difference between a short-term moving average and a long-term moving average.

After clicking on the MACD button on your trading platform, you will see stuff similar to these things underneath your forex dance floor. The MACD line, the Signal line and the histogram.

MACD Elements - Histogram, Signal Line MACD Elements - Histogram, Signal Line

Let’s first leave the histogram aside and focus on the MACD line and the signal line. These two lines are two moving averages with different speeds, so the faster one (the MACD line) will obviously be quicker to react to price movements than the slower one (the signal line). Let’s say that the MACD line is an eligible bachelor, and the signal line is, well, a pretty Forex Diva.

MACD Metaphor - Signal Girl and Moving Average Guy MACD Metaphor - Signal Girl and Moving Average Guy

The signal girl was minding her own business and walking in the opposite direction when the MACD guy crossed her over. This is how they met, and that is when the shopping begins!

Here is a simple interpretation for moving average convergence-divergence signals:

simple interpretation for moving average convergence-divergence signals simple interpretation for moving average convergence-divergence signals

When a new trend occurs, the fast line will react first and eventually cross the slower line.

Also Good to know...

The crossover MACD buy or sell signal works well in markets that are trending either up or down. It will deliver mostly false signals when the trend is changing or flat.

 

Moving Average Convergence-Divergence Buy and Sell Signals On Chart Moving Average Convergence-Divergence Buy and Sell Signals On Chart

This tool can also help you confirm a trend. When the MACD line is above the center line, whether its direction is up or down, the general daily trend is considered to be up. When the MACD line is below the center line, you can consider the general trend to be down. A change in the direction of the MACD line while it is still above the center line simply indicates that the market is having a temporary pullback and will eventually continue in its previous trend.

 

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Now let’s talk about the histogram with all those vertical bars. It looks as if it is very professional, has a lot to say, and only super-mega-smart financiers will understand it, but to be honest with you, the poor thing doesn’t have that much to offer. The histogram simply plots the difference between the fast and slow moving averages.

As the two moving averages separate, the histogram gets bigger, while when they cross over, the histogram disappears. It’s only there to make it easier for you to spot the crossovers!

As always, make sure you check in with the other points of the IDDA as well, if you decide to use MACD in your analysis.

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