Moving Average Convergence & Divergence Indicator
The Moving Average Convergence-Divergence indicator (MACD) is a model that describes the connection between two moving averages of a currency pair and tracks the momentum of price patterns. This model performs well in terms of safety and allows you to use whatever moving average we choose. The MACD was developed to apply 26-day and 12-day exponential moving averages (EMA) to a trading graph. The graph displays two lines that continuously bounce. Trading signals are produced using a two-moving average approach by crossing the two lines.
It is the most often used technical indicator in trading and may be used as a trend or momentum indicator. This indicator alerts traders about chances to join and exit positions. Therefore, traders admire it worldwide for its simplicity and versatility.
How to read MACD?
The MACD’s basic theory is not difficult to understand. In general, it determines the variation between an asset’s (forex pair) 26-day and 12-day exponential moving averages (EMA). Both moving averages compute their values using the closing prices of the period being monitored.
A nine-period EMA of the MACD itself is also shown on the MACD graph. This line, which is known as the signal line, serves as a catalyst for purchase and sale decisions. Since the points displayed move faster than the signal line, which is referred to as the “slower” line, this indicator is referred to as the “faster” indicator.
The MACD is one of the most often used indicators because of its ability to predict. But traders should know that it is not a magic button. The trend to converge or diverge is meaningless since a shock might occur at any time and cause the price to deviate significantly from the trend. Furthermore, because the MACD comprises moving averages, it still lags behind the price event. It is just as same as it would with any other moving average when a new price configuration emerges.
Until the trigger truly crosses the indicator line, you can have trouble reading the MACD indicator. Histogram design is a different approach to showing the MACD that is considerably easy on the eyes.
This image shows the distinction among both moving averages on a given date by each bar in the histogram. Since you can see how quickly the histogram bars are approaching or departing from the zero line, you don’t need to utilize the trigger line.
Quick Notes for MACD Reading
- At point Zero: The difference between the two moving averages is 0, and their respective numerical values are identical.
- When the bars go higher: Divergence, the increase in the gap between the two averages, promotes the continuation of the trend.
- When the bars begin to contract rather than expand: Keep an eye out for a shift in the signal when the two moving averages converge.
- The key point to be noted: The sell signal is given when the bars are upside down and below zero. What should you do if the bars stop being so negative? This signal indicates that the selling pressure (supply) has peaked. Theoretically, you don’t receive a purchase signal until the bars cross the zero line, but you might choose to take action before the line is crossed.