Forex Trading MACD

In a volatile and dynamic market like the forex everyone would require “a set of precise recommendations” or in other words accurate forex signals for successful trading.

Moving Average Convergence Divergence or MACD is a detailed method of technical analysis using moving averages for forex trading. Trading signals can be generated from price charts with the help of MACD.

The method is appreciated by forex traders the world over, for its simplicity and flexibility, as it can be used either as a trend or momentum indicator.

The method was developed by Gerald Appel in 1979. It plots the difference between a 26-day exponential moving average and a 12-day exponential moving average. Another 9-day moving average is generally used as a trigger line.

When the MACD crosses below this trigger it is a bearish signal and when it crosses above it, it's a bullish signal, with the corresponding implications for the currency's price in each particular situation.

Moving averages tell the average price in a given point of time over a defined period of time. These are known as ‘moving’ because they reflect the latest average, while adhering to the same time measure. To resolve the inconsistency between entry and exit, a forex trader can use the MACD histogram for both trade-entry and trade-exit signals.

MACD can also be used by combining two averages of distinct time-frames. Whether using 5 and 20-day MA, or 40 and 150-day MA, buy signals are usually detected when the shorter-term average crosses above the longer-term average and the price is likely to go up.

Conversely, if the shorter average falls below the longer one, sell signals are suggested as the price is likely to go down.
 
There are three kind of mathematically distinct moving averages: Simple MA; Linearly Weighted MA; and Exponentially Smoothed MA. The latter one is the preferred because it assigns greater weight for the most recent data, and considers data in the entire life of the instrument making it a more accurate indicator. Essentially it calculates the difference between an instrument's 26-day and 12-day exponential moving average.

With a look at the MACD studies, the forex trader can have an idea of the early signals or divergences between market prices and a technical indicator.

If the MACD turns positive and makes higher lows while prices are still tanking, this could be a strong buy signal. On the other hand, if the MACD makes lower highs while prices are making new highs, this could be a strong bearish divergence and a sell signal.