Macd Indicator Is A Verstaile Indicator

As a trader, you must become familiar with the Moving Average Convergence Divergence (MACD) indicator

. This is one of the most reliable yet the simplest forex indicator.

This is a hybrid tool that is helpful in determining the present market direction as well as measure the price momentum. Many traders use MACD as their sole confirming indicator. This multi faceted indicator acts as a sign of the trend momentum by representing the relationship between the two moving averages.

MACD is expressed as MACD A, B, C where A is the number of periods of the fast EMA. B is the number of periods of the slow EMA while C is the number of periods used to calculate the EMA of MACD.

The default settings for MACD are the 12 EMA, 26 EMA and the 9 EMA. MACD is the difference of 26 EMA with the 12 EMA. This line is plotted as the black line. Another line that is usually grey is also plotted alongside this main MACD line and it is the 9 day EMA of MACD.

When these two EMAs come closer together, a crossover can take place. When a crossover takes place, it means the current trend is losing momentum and market might reverse direction. In the same manner, when the two EMAs move further apart, it means the trend is becoming strong.

The MACD chart has both a linear component as well as a histogram. The black line or the dark line is the MACD which is the difference of the two moving averages. This is the faster moving line. The light line is the signal line or the average of the MACD over 9 periods. It is the slower moving component. The two lines move closer to and further away from each other over time and occasionally will cross each other.

The histogram depicts the variations in the distance between the two EMAs and it measure the momentum of the trend. When the bars on the histogram moves away from zero, it means positive momentum and when the bars move towards zero, it means decreasing momentum.

by: Ahmad Hassam

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