The Moving Average Convergence and Divergence or MACD is a momentum oscillator indicator that is mainly used to detect price trends. It is among the most important technical indicators used in forex analysis. The MACD is a powerful indicator if used effectively for assessing the strength and momentum of price trends, and to predict either its continuation or potential reversal.
What is the MACD Indicator?
The MACD is a trend-following momentum indicator that assesses market forces and indicates changes in momentum, direction and strength of a price trend. MACD uses moving averages to identify potential trading opportunities near support and resistance levels.
The MACD is represented by a histogram and consists of:
- The MACD line: it measures the distance between two moving averages, usually exponential moving averages (EMAs).
- The signal line: identifies changes in price momentum and triggers bullish and bearish signals.
The Histogram simply plots the difference between the MACD line and signal line and fluctuates in and around the zero designation. The signal line is designated to smooth out the sensitivity of the MACD Line.
It is calculated by subtracting the long-term exponential moving average (EMA) from the short-term EMA. The indicator signals a bullish trend when the MACD line is heading up, and a bearish trend when it falls lower below the zero level.
- MACD Line = 12-period EMA – 26-period EMA
- Signal Line = 9-period EMA
- Histogram = The difference between MACD line and signal line
The Moving Average Convergence and Divergence is designed to measure the relationship between two EMAs.
The Moving Average Convergence and Divergence has proved its effectiveness in predicting the upcoming market direction in conjunction with price action. It is unique in its concepts of convergence and divergence. If both prices and the MACD are moving in the same direction, this is known as convergence. This convergence affirms the momentum and strength of the direction. On the other hand, if the price is moving in the opposite direction of the MACD then we have a divergence which foreshadows a potential trend reversal.
Divergence is a powerful signal in technical analysis that points out positive or negative price moves ahead. A positive divergence occurs when the price makes a new low, while the indicator moves higher. On the other hand, negative divergence is when the price forms new highs while the indicator makes a lower high.
Divergence is seen as a warning sign that the current price trend is waning and about to reverse. It happens when prices lack clear directional trends, alerting traders that current prices are about to reverse. Divergence can be bullish or bearish. Bullish divergence indicates that the price is about to move higher. While the bearish divergence indicates lower prices. Learn more about Bullish and Bearish market trends.
Oscillators, MACD included, are the best and most common technical indicators used to detect price divergence in forex trading.
Advantages of using the MACD
Due to its reliability and ease, the MACD indicator is a very popular technical indicator that is widely used by most traders and analysts. It has the ability to confirm the strength of a trend as well as signaling the reversal point of the trend. Traders can rely on the MACD to detect bullish and bearish market trends. It is also utilized to confirm the strength of sell and buy signals.
On the other hand, the MACD may be less reliable for long-term trading. It is commonly used as a short-term indicator, which means it is best utilized for short-term market analysis. Another downside is that the MACD is lagging or trend following indicator. This means it signals a trend only when it starts, not before. It rather follows the price movement, unlike leading indicators that signal a trend before it happens. Meanwhile, the indicator does not anticipate all reversals and sometimes it can signal false signals especially when the divergence occurs when the price moves sideways. This is commonly known as false positive.
The Moving Average Convergence and Divergence is available on our Metatrader 4 (MT4) platform alongside the popular and effective technical indicators. Our top-notch trading platform comes with extensive tools for price analysis with a set of in-built technical indicators and charting tools. Trade on the go and keep up-to-date with current market activity from the convenience of your phone or laptop.
Open a forex account and get started with a whole kit of technical analysis indicators and tools.
On the MT4 platform, click on the Insert tab at the top of your chart, choose Indicators, then Oscillators and click on the MACD. Choose your preferred visualisations for the indicator, then press Ok.
Sharpen your Skills and Trade Better with our Trading Guides
Learn more about forex technical analysis and enhance your trading experience through our educational resources:
- The Beginner’s Guide to Forex Technical Analysis
- Forex Momentum Trading: Indicators and Strategies
- Top 10 Forex Chart Patterns Every Trader Should Know
- The Top 5 Profit Taking Strategies in Forex Trading
The use of technical indicators may vary depending on the trading strategy followed. Explore different trading strategies and choose the best type of analysis that suit your personality and trading goals.
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