How to use the MACD indicator in the Forex market

Created by the leading investment manager, successful trader and author of numerous publications by Gerald Appel, the MACD indicator based on Moving Average Convergence / Divergence is perhaps the most unique tool entering almost any Forex trading platform. Indicators MACD can simultaneously be attributed to trend indicators, and to oscillators. The uniqueness of MACD lies in the fact that it is able to generate trading signals on both trend segments of the market and lateral movement (flat). In addition, the use of this indicator allows you to determine the potential strength of movement, as well as (with a certain probability) a possible change in the direction of the market.

MACD indicator: description

For the construction of MACD graphs, two methods are used: linear and in the form of a histogram.

The linear MACD is built on the basis of three moving averages, of which only two are displayed on the graph. Directly the MACD indicator itself is the difference between two exponential moving averages (EMA with a smaller period is subtracted from the EMA with a smaller period). In order to get rid of random oscillations, the so-called signal line, which is a simple moving average (SMA), is used. And for its construction we use not the values of the price, but the difference between these two moving averages, only with a smaller period. The default values for EMA are 12 and 26, and for SMA, 9.

Settings can be changed. At the same time, the increase in values (for example, 21.50 and 12) prevents false signals, but it does not allow to determine in a timely manner the beginning of the market movement. Decreasing the settings (for example, 6, 13 and 5) makes the MACD indicator more sensitive to price changes, but leads to more frequent false positives.

To make it easier to recognize the change in the distance between the lines, a histogram is used, which is the difference between the fast (MACD) and the slow (signal) line. When the fast line is located above the slow line, the bars of the histogram are on top of the zero line, and vice versa.

It should be noted that in the trading platform MT4 (MetaTrader-4), unlike the same Rumus, only the signal line and the histogram are output, the MACD indicator itself is not displayed.

MACD indicator signals

The intersection of the MACD signal line in the direction from top to bottom is an explicit sell signal. In this case, the arrangement of histogram bars below the zero line only amplifies this signal. Crossing the line of the MACD signal line in the direction from the bottom up, on the contrary, is a buy signal, and finding a histogram at a position above the zero line is also a strong signal to open a long position.

The emergence of a contradiction between the indication of the indicator and the price chart indicates a divergence ("bearish" - if the higher maximum of the price did not find its confirmation by the maximum MACD - or "bullish", when the lower minimum is not confirmed) and is a sign of a possible change of trend.

Disadvantages of the MACD indicator

1. Both the line indicator and the histogram very often produce false signals, especially on hourly charts and less. Therefore, it is better to use them on day timeframes and higher.
2. When forming trend signals, the linear indicator is triggered with a significant delay.
3. Since the MACD indicator calculates the difference between the two moving averages, this value is absolute, not relative. Therefore, it is difficult to compare MACD levels over relatively long periods of time, especially for those instruments that have changed exponentially.
4. Using MACD, it is difficult to determine the levels of overbought and oversold.

Nevertheless, the MACD indicator is recognized as one of the most reliable technical indicators in the foreign exchange market. His signals are quite simple to understand and allow you to correctly assess the current situation and timely conclude a profitable deal even for beginners.