How to Use MACD Indicator in Forex Trading - ForeXposed

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Friday, September 8, 2017

How to Use MACD Indicator in Forex Trading

Moving Average Convergence Divergence
How to Use MACD Indicator in Forex Trading
 Metatrader version is as follows:
How to Use MACD Indicator in Forex Trading
You will find out why the Moving Average Convergence Divergence (MACD) is said to be taking the same formulation with Moving Average (MA). Let's look at the origin of the above lines (MACD line, the trigger line, histogram, and centerline):


MACD Line

By default the MACD line formulations are XMA12 – XMA26, it’s the gap between XMA 12 period and XMA 26 period. Because it’s using Exponential Moving Average (XMA), then the MACD properties also resemble as XMA properties, that is providing early signals than any other MA.


Trigger Line

The trigger line by default is XMA9.


Centerline

Is ordinary line. Zero line which is limiting the negative histogram and positive histogram.


The Histogram

The formulations for the histogram is MACD line - Trigger line. Used as an overbought/oversold indication. I will make it clear, later.

The other question is, can we use other XMA period for MACD line and trigger line? Of course, we can. If you already proficient then you can explore with a different period.

Maybe a question comes to our minds, why we should bother using MACD whereas only a reduction of XMA. Not so in reality. Through this simple formulation, MACD indicators proved to be able to provide information not only trend that will happen, but more than that.

The MACD can be used to find out the transition momentum which is rated strong or weak, can also be used to find out for the overbought/oversold condition on the market that could trigger the trends change.


MACD for Trend Changes

This is the typical uses of MA that used by MACD as MACD line and trigger line. How to read trends change from the Bullish trend towards Bearish, and vice versa is similar to the way we read the trends change on the MA. The lines used to read it is MACD line and trigger line. Let's consider again the image below: 
How to Use MACD Indicator in Forex Trading
Just like the rules for reading the MA, on MACD the rules applicable when the MACD line crossing the trigger line from below, then it will change the trend towards Bullish trend. Also applies to the contrary, when MACD line crossing trigger line from above, it will change the trend towards Bearish trend.

Then what are its correlations with the center line? Are there any correlations between MACD line and trigger line intersections to trends change? Yes, there are! The MACD line and trigger line that crossing center line is the trends change indicative. But in this case is the trends change in the long run.

Maybe the long-term trend criteria here is somewhat relative. That is to say, depending on the type of the currency itself. So, does the ‘trends length’ for GBP is about 3 months, but on EUR and AUD is 2 months, for example. So, depending on the currency that we choose, also don't forget the time scale that we use.


Overbought and Oversold on MACD

From the simple formulations of MACD, we are not only able to determine the trend in the long run, as well as the short term, there are one more uses of MACD i.e. as the overbought and oversold indicators. Although rarely used, it's good we know it too. Just maybe you liked this indicator as overbought and oversold areas determinant.

The overbought situation is an indication that the market has experienced a burnout in buying the concerned currency. If this happens, then the predictions of price reductions will occur in a few moments later. So is oversold. If oversold happens then predicted that the price will strengthen towards its resistance point. Look at the screenshot below:
How to Use MACD Indicator in Forex Trading
Note when the histogram moving up and taking place above the center line (zero lines), then the price is likely to move up, and vice versa, when the histogram is moving down towards the negative area, the price also moved down.

The line below the centerline (minus area) is an area that called as oversold area, and the line above the center line (positive area) is the overbought area. The prices drop is occurring at a time when the histogram (well, this is the usefulness of the histogram), leaving the area.

Let us succinctly the norms applicable to MACD indicator:

1.The MACD line crossing the trigger line from below.
Trends change toward Bullish.

2. The MACD line crossing the trigger line from above.
Trends change towards Bearish.
3. MACD line and trigger line is above the centerline (positive areas).
Long Bullish trend.
4. The MACD line and trigger line is below the centerline (positive areas).
Long Bearish trend.
5. Positive/negative histogram.
Overbought/oversold conditions.
6. Positive divergence.
The price will come along to move up.
7. Negative divergence.
The price will come along to move down.

Got here my explanation about MACD indicator. We meet again in the next indicator explanations.