What is MACD Indicator used in Forex Trading?
The MACD indicator or Moving Average Convergence Divergence indicator is a tool used in forex analysis. Though MACD indicator is one of the most valuable forex tools in technical analysis not many traders are utilizing it to the full extend. This is mainly because many traders often assume that MACD indicator is a complicated tool which is difficult to use. The truth though is that if you can spend some time to learn and understand this useful forex tool, you will be able to trade a lot better and make more profits.
The MACD Analysis
The name Moving Average Convergence Divergence might sound rather complex and sadly most people don’t even try to learn about this currency trading tool because of this complicated name. So new traders often prefer automated forex trading software programs like FAP Turbo or Forex Megadroid instead of utilizing a forex signal service like Forex Ambush and analyzing it with forex tools like MACD indicator. Even though these forex software can make you money, a solid manual trading system (see Forex Confidante Review and LMT Forex Formula) coupled with good technical analysis is the key to big profits.
Similar to most forex tools, MCAD indicator can identify and alert us when a new trend is forming, so that you can get in on it and make money. The MACD indicator accomplishes this by plotting the correlation between two moving averages.
The MACD settings are normally expressed as three numbers. Usually you might see 14,28,9.
The first two numbers (14 and 28) indicate the number of periods used to calculate two moving averages. The faster moving average line, which is often green on the chart, measures the moving average of the difference between the 14 period and the 28 period moving averages.
The slower moving average line is often indicated by red color on the chart. This red line plots the average of the last 9 (or whatever is the third number) periods of the faster moving average line. It generally shows smoother curves since its effect is to smooth out the fast moving average line.
Traders using forex technical analysis often make the mistake of assuming that the first number on the MACD indicator (14 in this example) relates to the faster moving average line, the second number (28) relates to the slower moving average line and the third number (9) relates to the histogram at the bottom of the chart. That is not right.
MACD -Divergence and Convergence
The histogram that measures convergence and divergence is the series of blocks stretching above and below an axis near the bottom of the chart. This basically records the difference between the quicker and slower moving averages.
When the two moving averages detach from each other (diverge), the blocks of the histogram will become longer. As they get closer (converge), the blocks turn out to be shorter. If these two lines cross, the blocks of the histogram will change from stretching above the line to falling below it or vice-versa.
Thus the histogram indicates the convergence and divergence of the two moving averages. Hence this forex technical analysis tool is called the MACD indicator or Moving Average Convergence Divergence indicator.