Forex MACD Indicator Explained

Before I start to tell you the power of MACD, I must spend sometime to do a introduction on what is MACD and who invented it.

MACD is a forex indicator that is developed by Gerald Appel who has written 12 books on investment strategies. He is also the president of Signalert Corporation which is an investment firm that helps to manages over $290 million dollar of capital.

MACD is in fact one of the simplest and reliable forex indicators I have used so far. As it is actually analyzing and displaying chart for past data, it is often know as a lagging indicator. However there are times where you can use MACD as a leading indicator to help you predict the next movement of the price.

1) How to Setup Your MACD

The most common setting for MACD is 26 or 12. What this means is 26 days and 12 days Exponential Moving Averages. The 26 EMA is a slower setting for MACD which will produce a slower indicator that is less prone to whipsaws. As for the 12 EMA, it is usually a faster setting for MACD.

In the MACD indicator, there will usually be a 9 days EMA that will represent the trigger line while the histogram represents the difference between MACD line and its trigger line.

2) How to Read Your MACD

There are several ways you can use the MACD to help you in your trade but first of all you need to understand how to read your MACD.

i) Bullish Crossover: Bullish crossover usually indicates a upward movement in the market and the way you can identify a bullish crossover is through the two line in the indicator namely; MACD line and its trigger line.

Whenever MACD cut through its trigger line in the upward direction, it usually indicates an uptrend or an upward movement.

ii) Bearish Crossover: Bearish crossover usually indicates a downward movement of the price and the way you can identify a bearish crossover is when the MACD cut through its trigger line in the downward direction.

iii) MACD Divergence: This is the best signal any trader can get from MACD: Divergence. First of all, let me explain to you what is MACD divergence all about.

When we say that there is a divergence in MACD, we are referring to the scenario where MACD and the price are not in the same direction movement pattern.

Example: When the highs of a currency pair is getting higher and higher, MACD highs are getting lower and lower. We are experiencing something called “Negative Divergence.

From my experience, you will usually see a downside movement after a negative divergence is formed.

When the lows of a currency pair is getting lower and lower, MACD lows are getting higher and higher. We are experiencing “Positive Divergence”. Whenever you see positive divergence, you will usually see a upside movement in price.

3) How To Use MACD to Form Forex Buy Sell Signal

It will be very risky if you trade based on just one of the signal you have learn above. You will have a more robust forex strategy if you are able to combine these two signals above to constitute your buy sell signals.

MACD is a good indicator when it comes to buy sell signal as it always allow the trader to validate a trend line break or a breakout in price. With this function, MACD can help the trader to identify fake outs in trading.

I will be writing more posts on how you can profit from MACD and hope that you can benefit from them.