Created by a 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 that enters almost any Forex trading platform. MACD indicators 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 both on trend segments of the market and during lateral movement (flat). In addition, the use of this indicator allows you to determine the potential strength of the 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 slidingaverage, of which only two are displayed on the graph. Directly the MACD indicator itself is the difference between two exponential moving averages (from the EMA with a smaller period, the EMA with a longer period is subtracted). 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 price values, 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.
The settings can be changed. At the same time, increasing the 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. Reducing 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 changethe 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
Crossing the line of the MACD signal line indirection from top to bottom is an explicit sell signal. In this case, the arrangement of histogram bars below the zero line only enhances this signal. Crossing the line of the MACD signal line in the bottom-up direction, 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 indicationindicator and the price chart speaks of a divergence ("bearish" - if the higher maximum of the price did not find its confirmation by a maximum of 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
- 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.
- When forming trend signals, the linear indicator is triggered with a significant delay.
- Since the MACD indicator calculates the differencebetween two moving averages, this value is absolute, and not relative. Therefore, it is difficult to compare MACD levels over relatively long periods of time, especially for those instruments that have changed exponentially.
- Using MACD, it is difficult to determine the levels of overbought and oversold.
And yet the MACD-indicator is recognized as one of the mostreliable 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.