Developed by Gerald Appel, the Moving Average Convergence-Divergence, or MACD, is an oscillator that measures price momentum. The indicator also measures the strength, direction and duration of a trend. Forex traders can use the MACD to confirm an entry price or exit point.
Understand that the MACD can be used whether a currency pair is trading sideways or is in a downtrend or uptrend. The MACD consists of three components. The first component is two EMA, or Exponential Moving Average, lines. One line is known as the fast MACD line and the other the slow MACD line. The two lines are always displayed in different colors. The second component is the MACD histogram. The histogram shows the strength and duration of a trend. The third component is the point-of-reference zero line. A reading above zero is a buy signal while a reading below zero is a sell signal.Step 2
Go to your Forex trading account and pull up a currency pair chart. Find the technical indicator list and click on MACD to add it to your chart. The software package will automatically display the MACD along with your price indicator, such as candlesticks. The histogram is often displayed beneath the chart. Most MACD software uses 26, 19 and 9 as default settings, which is the moving average for the past 26 closing periods, the past 19 periods and the difference between the 26 and 19 closing periods.Step 3
Change the default settings based on market conditions. For example, if the market is volatile, you can shorten the time frame to coincide with shorter time frame trading.Step 4
Look for MACD convergence or divergence. When price, the MACD and the histogram are moving in the same direction, they are in convergence. Convergence confirms an existing trend and the histogram reveals the trend’s strength. Divergence occurs when price moves opposite the MACD and the histogram. The existing trend is breaking down and the histogram will indicate the strength of the trend breakdown.Step 5
Trade the convergence by waiting for the MACD, histogram and price to move in the same direction before going long or short. Use a divergence to help predict a trend’s turning point. Many traders will wait until the MACD is above or below zero before entering a trade.
- Use other technical indicators such as Bollinger Bands to confirm the MACD information before placing a trade.
- The MACD can give traders false readings. Wait for trend confirmation before opening a trade.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.