MACD Indicator

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The MACD indicator is probably the most popular forex indicator there is when it comes to daytrading.

Trading the MACD indicators can be as simple or as complicated as you want it to be.

As you may know the standard MACD is calculated by taking a 12 period exponential moving average and subtracting its 26 period exponential moving average. The resulting line is then plotted which moves above and below a center line which is placed set tozero. A 9 period EMA signal line is normally drawn along side the MACD line, although you don’t have to use 9 or infact you don’t have to use a signal line at all.

When the MACD line is above zero this tells the trader that the 12 period exponential moving average is trading above the 26 period exponential moving averages. When the MACD line is below zero this tells the trader that the 12 period exponential moving average is below the 26 period exponential moving average. When the MACD line is below zero and falling this represents an increase in the negative gap between the 12 and 26 day EMA’s which is considered a sign of increasing bearish momentum. Natuarlly the the opposite is true if the MACD is ablve the zero line.

The signal line often acts as a “crossover” indicator. This allows you to trade changes in the MACD direction earlier than a cross of the zero line. This gives you counter trend signals i.e sells when the MACD line is above zero and buys when it is below.

When the MACD histogram (assuming your charting indicator uses one) is above zero thisindicaes that positive momentum is increasing. Conversely when the MACD histogram is below zero this is an indication that negative momentum is increasing. The higher or lower the histogram goes above or below zero the greater the momentum of the trend is thought to be.

Trading crossovers, whether using the zero line or the signal line, is obviously the simplest way to trade the MACD indicator. It gets a little more complicated when it comes to trading divergences.

There are two ways you can trade divergences. You can either look for differences between price and and the peaks of the MACD line or you can look at the peaks of the histogram and compare to price instead. As the histogram shows the difference between the MACD and signal line they will give different signals.

And this is where you need to make up your own mind. Which you like the most. Which shows you the signals that you “see” that will allow you to make good trading decisions.

For either one, a divergence is the same. New increasing peaks on price but lower highs on the indicator indcate a decline in momentum and possible reversal coming. And if you see rising peaks on the MACD below the zero line but a new lows in price you may want to start to protect your shorts and the trend could be coming to an end.

Why not check out this MACD And Stochastic strategy from Investopedia

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