MACD (Moving Average Convergence/Divergence indicator) in Forex trading

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The MACD – Moving Average Convergence/Divergence indicator – is one of the oldest tools in the technical analysts toolbox. It was devised by Gerald Appel in the 1960s and has seen decades of use by traders and lots of study into its strengths and weaknesses. All charting packages provide it as one of the standard Forex signals.

How It Works

The MACD is simply the difference between a 26 period exponential moving average (EMA) and a 12 period EMA. The MACD is normally graphed along with a Signal Line, which is a 9 period EMA of the MACD itself. The period is decided by the trader. It can be based on 60 minute, 4 hour, 1 day or longer periods.

The MACD, being the difference between a short term moving average and a longer term moving average, is a trend following indicator. With the addition of the signal line the MACD can be used to generate several trading signals.

MACD Trading Signals

• MACD crossing the zero line – the MACD crossing up through the zero line is bullish, and when it crosses down through the zero line it is bearish.
• MACD crossing the signal line – the MACD crossing up through the signal line is considered a buy signal and when it crosses down through the signal line it is seen as a sell signal
• Divergence between MACD line and price – if the price makes a new low but the MACD doesn’t, this is a positive divergence and is interpreted as bullish. Likewise, if the price makes a new high and the MACD doesn’t this is a negative divergence and is bearish.

MACD Trading Signal Precautions

A large part of the popularity of the MACD is that the trading signals are easy to interpret, but they cannot be followed blindly. Since the market crash in 2000 the general trading consensus is that the MACD should not be used on its own to make trading decisions, but as triggers to look at other indicators for confirmation of market movement.

For example, the signals from an MACD over a short time period, like a 15 minute chart, should be confirmed by looking at 1 hour, 4 hour or even 1 day charts. If the same signal appears in a longer period chart, then it is time to look for further support, perhaps through candle patterns or support and resistance levels.

MACD Periods

The standard periods for the EMAs used in the MACD are 12, 26 and 9. These were chosen by Appel in the 1960s for the stock market and his time period was measured in days. They are not written in stone and are not necessarily the values that will generate the most accurate signals for your market.

We are not going to recommend any values for any currency pairs here, as they change with market conditions, but it is something you should consider and research.

Summary

The MACD is a great trading tool. Its strength is in pointing you towards trading opportunities as they arise. However, don’t rely solely on its signals. Instead of using the MACD as a signal to buy or sell, use it as a signal that it is time to look deeper into the market.