MACD indicator

The MACD (Moving Average Convergence Divergence) indicator can add a degree of certainty to your Forex strategy. It is a lagging indicator which follows price action. A center line, or zero line, often called the water line is also shown in the MACD indicator. When MACD is above the water line an upward trend is indicated, when it is below the water line, a downward trend is indicated. These technical indicators are very useful parameters that forecast, with a high probability, the future trend of the market.

MACD was developed by Gerald Appel in 1979. It plots the difference between a 26-day exponential moving average (EMA) and a 12-day exponential moving average. A 12-day EMA is obviously faster than the 26-day EMA. A 9-day moving average is generally used as a trigger line, to indicate a bearish signal (time to sell) or a bullish signal (time to buy). Some traders regard MACD divergence as a Forex signal to enter a high probability trade. They almost suggest you get straight in to a trade as soon as you see MACD divergence.

Some charting packages also include what is called a Histogram in the same charting area as MACD. The histogram merely represents in a different way what is happening between the two MACD lines as to market momentum. The wider the gap between the MACD lines, the higher or lower the height of the histogram bars. To identify MACD divergence, simply draw a line across the highs if MACD is above the zero line, or draw a line across the lows if MACD is below the zero line.

MACD in forex trading responds to the speed of price movement. Most of the forex traders use this to measure momentum and to gauge the strength of the price move than to determine the direction of a trend. We must remember, MACD is just a technical indicator. A serious weakness of MACD is they lag the market. Logical and methodical approach in managing the rules will result in higher gains. The concept of MACD histogram offers a new way to trade an old idea in forex. It ensures huge scaling up of positions and applies equally for day trading and position trading.