MACD

The moving average convergence-divergence better known as the MACD is a trending indicator that was developed by Gerald Appel, in the late 70s and is built on exponentially smoothed moving averages. It consists of two exponential moving averages that are plotted against the zero line. These two lines are derived from the past historical price movement of the currency you are studying.

These lagging indicators that are the moving averages are made up of the 12-day and 26-day EMA where the first is the faster one and the second is slower. Alongside those two moving averages is a 9-day EMA that is plotted and acts as a trigger line for buy and sell signals. A bullish signal occurs when the MACD moves above the signal line that is the 9-day EMA and conversely a bearish signal is triggered when MACD moves below the 9-day EMA. These crossovers suggest that it may be a good time for you to buy or sell.

The histogram that you may have seen is simply the difference between the MACD and its 9-day EMA. Histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA. A rising price will provide momentum to the histogram thus increasing the speed of price movement making it stretch in shape in a positive direction. In a declining market, price decrease will cause the histogram to stretch in the opposite direction.

Divergence occurs when price makes a new high or a new low but MACD fails to show correct data stating a divergence between price and momentum. Divergence is fairly reliable and is best used on bigger timeframes so that you can jump in the market at the right time to capture the big moves. Positive divergence occurs when MACD forms a series of higher lows (usually two higher lows) and forms a negative one when MACD forms a series of lower highs (two lower highs)

The common default setting for MACD is 12,26,9. You may change value to which ever numbers suits you best.

Here is a screenshot of our handy indicator in action:

Bearish sign:

- Negative Divergence
- Centerline Crossover
- Moving Average Crossover

My 2Cents: When using any indicator, do not just rely on the signal from one indicator, it is always good practice to combine the signals with other indicators to increase your probability of success.

Happy Trading...

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