Have you used the MACD Forex strategy in your trading? The MACD is an oscillator indicator for stock market trading. It does a lot to show you the strength and trend of the market or currency you’re trading. Learn the four components of what make up the MACD indicator and how to use it in real world trading as a beginner.
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Moving Average Convergence Divergence (MACD Forex Strategy)
Moving Average Convergence Divergence or MACD is an oscillator used to analyze the financial markets. The indicator was developed by Gerald Appel in the 1970s primarily to analyze the stock market. However, it’s equally famous among the Forex traders. So you can use the MACD Forex strategy in your trading.
The MACD comprehensively focuses on four key elements which are direction, strength, momentum, and duration of the trend. The MACD Indicator is calculated using three different Exponential Moving Averages (EMA) that are plotted on a zero line with a histogram. When you plot MACD on the chart the default setting of the EMAs is 12, 26, and 9 periods. The first line that gets plotted is the MACD line.
And it’s calculated by subtracting the 26 days EMA from the 12 days EMA. Then we have a second line that’s plotted by using the 9 days EMA of the price. Since the second line is 9 days moving average it’ll lag behind but trace out the MACD line (first line) and will work as a signal line. The third thing plotted is a histogram that shows how close or far apart from a crossover.
So to read the signal from the MACD indicator you need to look at the two moving lines. When they crossover they provide a signal. If the MACD line crosses the signal line from the above it signals a bearish move. And if it crosses the signal line from below it signals a bullish move. These are called the single line crossovers.
Another MACD Forex strategy signal the indicator produces is when the MACD line moves above or below the Zero Line. A cross above the zero line is bullish while a cross below the zero line is a bearish signal. These are called zero crossovers and it is worth noting these signals are not as strong as the single line crossovers.
The Third MACD Forex Strategy Signal
Finally, the third type of MACD Forex strategy signal is produced when a divergence among the asset price and the MACD takes place. So, for instance, a bearish signal is given when the price of an asset makes a new high. But the MACD does not confirm with its own new high. A bullish signal is given when the price of the asset makes a new low and the MACD does not confirm with a new low.
Below is a classic example of a bearish and bullish MACD crossover occurring on a EUR/USD chart. At first, the price was trending lower from 1.1400 until a bullish crossover occurred at 1.0650 level. Following the bullish crossover, the price rebounded and peaked at 1.1150. But around the same time, a bearish crossover occurred as well and the price once again followed a downtrend towards 1.0800.
Like anything forecasting indicator, the MACD indicator can also produce false signals. Therefore, you must carefully look at the price patterns first. Then combine the information you get with other indicators for a strong signal.
The MACD Forex strategy is a good one for confirming the trend and strength of said trend. As with any indicator, remember that it’s not the end all be all in trading. So make sure to get confirmation before trading any move you see from an indicator or pattern. If you’re looking to learn strategies like this live, look no further than our trading discord!