The Moving Average Convergence and Divergence, known as the MACD indicator, might be the most popular technical indicator out there, and it is one of the main ones used in FXLORDS’ Managed Forex Accounts, Forex Trading Signals, and it is among subjects discussed in the Training Course.. Usually it is used as a confirmation to other technical indicators and chart patterns such as the Head and Shoulders and the Bollinger Bands. This indicator consists from the following:
- MACD line — The difference between the Moving Average of 12 and 26 periods. (The blue line)
- The signal line — It is simply the 9 periods moving average which is plotted on the MACD display itself. (The red line)
- The Histogram — It is the difference between the MACD line and the signal line and it appears as a “bar chart” included in the background of the MACD display and it look like parallel lines. The actual height of the bar is the difference between the MACD and signal line itself.
One of the characteristics that makes this indicator very useful is its effectiveness in high volatility or fast moving markets. There are four common ways to use the indicator, they are as follows
Uptrends and downtrends — This is visible using the Histogram. When a long Histogram bar is followed by a shorter one, the Histogram changes its bars’ color. When it does and the Histogram is below the zero level, then it mean that the trend has reversed upwards, and similarly, when the Histogram is below the zero level, then it mean that the trend has reversed downwards.
Crossovers — The classic method of using this indicator which clearly shows buy and sell signals. When the Moving Average Convergence and Divergence line crosses the line signal line from bottom then it is a signal to buy. Similarly, when the MACD line crosses the signal line from the top then it is a signal to sell. It is also common to buy and sell when the MACD line crosses the zero level.
Overbought and oversold conditions — The Moving Average Convergence and Divergence indicator is also useful when identifying overbought and oversold conditions. When the short moving average pulls away dramatically from the long term moving average, or in other words, when the MACD value rises, it is likely that the price is overbought and will soon return to more realistic levels. Also, when the value of MACD fall to a new record low below zero level, it is likely that the price is oversold and will soon return to more realistic levels
Divergence — It is an indication that the current trend is near an end, and it happens when the price deviates from the value of the Moving Average Convergence and Divergence line. Upward or positive deviation occurs when the MACD line reaches a new high while the price the was unable to succeed in reaching a new one, and vice versa, a downward or negative deviation occurs when the MACD line reaches a new low while the price was unable to succeed in reaching a new one. These deviations are of great importance when they converge with overbought and oversold conditions.