Moving Average Convergence/Divergence (MACD)
Moving Averages Convergence-Divergence (MACD) is a technical analysis tool that helps to track changes of the trend movement. The program shows a relationship between two moving averages in the market and consists of two lines - primary and signal. On the MT4 platform, the indicator line is represented in the histogram, and the chart itself appears in a separate window.
Use of indicators when trading in the Forex market helps to minimize financial risks and show a good time to buy and sell shares. One of the standard tools of technical analysis is MACD Indicator. Below we will characterize this analysis tool. To test MACD with your trading strategy, download it on the MTDownloads website.
How to calculate MACD?
Moving Average Convergence/Divergence is an indicator showing the difference between two exponential moving averages: the 26-day and 12-day. The 9-day signal line is put on the MACD line: it shows acquisition and sale opportunities. The difference is displayed in a separate window when working with the program.
The graph can be drawn on any time interval ranging: from five minutes to days and even longer. Fixed close price is usually used as the averaging price for calculations. Also, there is also the possibility to consider other prices: open, maximum or minimum prices, and different combinations of these numbers.
MACD gives a signal to buy when the level of its line exceeds the level of the signal line. Selling is better if the tool is under its signal line.
The program is most useful when trading in the fluctuating market. There are three basic methods to use this trading robot:
- overbought and oversold market conditions.
How is MACD applied?
When using the intersection method, the main rule is to sell at the moment when the main line of the indicator is from the signal line. Similarly, buying is appropriate when the tool rises above the level of the line signal. Another possible way to analyze trading signals is buying or selling assets when the MACD value crossed the 0 level bottom-up or top-down.
This tool helps traders being an indicator that shows the overbought or oversold areas. If the indicator goes up (short moving average moves away from the long line), it is likely that the asset prices are far from the "normal" level and are likely change to a downward direction. When trading, please, keep in mind that the MACD levels of overbought or oversold areas frequently change depending on the asset you trade.
If you see that the MACD indicators and the asset price move in different directions, a trend will soon reverse. The bearish divergence is considered to be the moment when the program shows new lows; the asset value is not cheaper at this time. Bullish divergence, on the contrary, takes place when the indicator line moves to new highs; the price does not move up.
Pros and Cons
The advantage of MACD is it can produce an accurate technical analysis to verify the strength of any trend, its direction, and possible reversal points. This indicator is a permanent element of technical analysis.
Using MACD is very easy since even the novice traders operate successfully with it. One of the advantages of MACD is that its shape is very smooth compared to the price graph and the other momentum indicators. This factor may more accurately determine the general trend.
You must beware of mechanical transactions by each intersection, because there is a likelihood of false trading signal and, thus, the serious risk to lose your funds. Especially if the market is unsustainable at the time of the trade, the trend will be lateral. Intersections can be filtered by using it in combination with other indicators of technical analysis.
The uniqueness of Moving Average Convergence/Divergence consists in the successful execution of two functions: trend observation and being an oscillator. This duality is very rare for indicators.
Gerald Appel, a creator of the tool, recommended using the most short-term MACD signals for asset acquisition. This fact is combined with the theory that financial markets are in the position of growth rather than decline. Trading on long time frame will be as efficient as possible.
Since Forex trading with MACD is straightforward, we recommend you to download this trading tool on the MTD website and take advantage of it right now!