MACD for Online Forex Trading

Posted March 18th, 2010 by Rapid Forex 12 Comments »

In the past few days I’ve blogged about technical indicators for online forex trading. Along with moving averages, the MACD is one of the valuable forex trading tools you’ll have online.

MACD, which is an acronym for moving average convergence divergence, is a momentum oscillator, meaning that it reflects the strength at which the market is oscillating (remember that the market moves in price swings, or oscillations). The MACD is one of the most popular technical indicators for online forex trading.

Components of the MACD

First, the MACD includes a line that represents the difference between the 26-period exponential moving average (the slow EMA) and the 12-period exponential moving average (the fast EMA); this line is often referred to simply as the MACD.

Second, the MACD includes a line that represents a 9-period exponential moving average; this line is known as the “signal” or “trigger” line and is used in conjunction with the first line.

The first indicator that the MACD reveals is based off of those first two lines. When the MACD (the difference between the fast and the slow exponential moving averages) crosses over the trigger line it offers a buy (bullish) signal.

When the MACD crosses under the trigger line it offers a sell (bearish) signal in online forex trading.

The smaller circles highlight points where the MACD crosses 1) over the trigger line (the buy signal) and 2) under the trigger line (the sell signal). As it is in this chart, the MACD is usually represented by a red line while the trigger is usually a blue line.

Another aspect of the MACD indicator is the histogram (which you can see in green in the following screen capture image). The histogram is a good momentum indicator, offering information about the strength of price movement. While the histogram does not reveal any direct buy or sell signals, it is a useful tool to use in conjunction with other indicators when analyzing possible reversals (if the market is slowing down it may be headed toward a reversal; this slow down would be reflected by lower bars in the histogram).

The MACD used in Online Forex Trading

A third aspect of the MACD is that it is plotted against a zero line. In essence, the difference between the fast and slow exponential moving averages is converted mathematically into an oscillator that fluctuates above and below a zero line.

MAC Signals For Online Forex Trading

The MACD gives the following signals that can be used in forex trading online:

When the MACD line crosses over the zero line it offers a buy signal.
When the MACD line crosses below the zero line it offers a sell signal.

Take a look at the MACD forex chart shot to see these signals. The two larger circles represent the market 1) crossing under the zero line (sell signal) and 2) crossing over the zero line (a buy signal).

The fourth aspect of MACD is that its trends (swings) can be compared to the price swings (trends) in the online forex trading market.

MACD divergence is when the MACD line is trending (swinging) in one direction while the market is trending in another.

This divergence can offer information about the future movement of the market. If the divergence is positive (MACD is trending upward while the market is trending downward) the market may be headed toward a rally (that, then, is a buy signal).

If the divergence is negative (MACD is trending downward while the market is trending upward) the market may be headed for a price drop (that, then, is a sell signal).

Looking at the movement of the histogram can also reveal divergences between prices and the MACD (the histogram may reveal those divergences before the MACD does).

In addition to the MACD, stochastics are also commonly used in online forex trading. I’ll be posting about stochastics in the next rapid forex blog post.

Tags: ema, indicators, MACD, moving average convergence divergence, online forex trading, oscillator Posted in indicators

12 Responses to “MACD for Online Forex Trading”

Tony Martin Says:
March 19th, 2010 at 3:12 am
I’ve wondered about how to interpret the MACD before.

Thanks for sharing an explanation of them.

[Reply]
Jeff Hokins Says:
March 19th, 2010 at 9:25 am
Brian,

You’ve explained that this is an oscilattor, but some of the folks reading this might not fully get that, so I’ll try to elaborate.

An oscillator means that this indicator will move up and then back down. When it’s at it HIGHEST range, it’ll come back down (at some point), when it’s at it’s LOWEST range it’ll jump back up.

I lindicator because it shows you how fast (momentum indicator) the prices are shooting up. When the MACD starts to fall back towards zero, the prices are still going up, but the trend is losing some steam and a reversal is imminent. I use this as a pre-reversal signal to start looking for a morning/evening star, trendline break, etc…

I hope this helps, just trying to enhance what you wrote to help everyone out

JEFF

[Reply]
Rapid Forex Reply:
March 19th, 2010 at 11:26 am
You brought up some good points Jeff. Thanks for sharing this with everyone who is reading the rapid forex blog.

[Reply]
Vincent Thomas Says:
March 19th, 2010 at 10:20 am
I thought MACD stood for:

Moving
Away from
Crappy
Decisions

At least it could mean that if you thought the MACD was an that provided valuable forex trading information.

[Reply]
Rapid Forex Reply:
March 19th, 2010 at 11:28 am
That’s funny Vince. I tried thinking of another one, but you got me on this one. Great sense of humor.

[Reply]
Ronnard Says:
March 23rd, 2010 at 11:18 pm
Why are there used 12 and 26 periods ?

Is that historically founded ? In principal one could use any period, like 12 and 24, if one wants to do day trading, or 15 and 60, if one focuses onto 1 hour trading.

regards

Ronnard

[Reply]
Rapid Forex Reply:
March 24th, 2010 at 12:26 pm
Ronnard,
You’re right, the periods aren’t set in stone. They’ve worked well in the past for me and other traders. You’re certainly welcome to use other periods. The MACD is simply there to give you a visual of the divergence, so using a short (small #) and a long (large #) is all that’s needed.

[Reply]
Tim Says:
April 20th, 2010 at 5:57 am
Hi Brian

I really enjoyed reading and studying this post for the third time, which has helped me understand about these indicators a whole lot better. Could you show a past trade that you’ve done showing how and where each indicator is applied? This post hast been very insightful!

Thanks,

Tim

[Reply]
Rapid Forex Reply:
April 20th, 2010 at 5:59 am
@Tim – I’ll be showing more about this in the Forex Sailing course & the 90 day bootcamp. Forex Sailing will be done by the end of April & the 90 day bootcamp will kick off in May. I’ll keep this in mind when doing those events & try to work it on for you. There will be plenty of trade examples using all of the stuff I’m teaching on the blog.

[Reply]
Kulvadee Says:
April 20th, 2010 at 2:35 pm
Can you teach how you setup your chart?

Thanks.:)

[Reply]
Rapid Forex Reply:
April 20th, 2010 at 3:41 pm
@Kulvadee – watch the videos that I’ll be releasing next week. They’ll answer a lot of your questions

[Reply]
patricia Says:
May 2nd, 2010 at 9:37 am
Nice one on MACD – moving away from crappy decisions! I like it. But it could confuse some of the newbies….The settings for the MACD helps to identify the trend continuation or possible reversal. It has been used with EW theory as well. Hope you will be sharing your knowlegde on the MACD and EMAs.

[Reply]