subject: Forex Trading - How To Use The Macd And Macd Histogram Indicators [print this page] Technical analysis is used by the vast majority of forex traders because it really does help you find lots of high probability set-ups. There are lots of different technical indicators you can use, but one of the most common ones used by a lot of traders is the MACD indicator (short for Moving Average Convergence / Divergence).
This indicator will generally be available to you regardless of which particular charting software you use, and is generally very effective. It basically consists of two lines which comprise the 12 and 26 period EMA (shown as one line) and the 9 period EMA.
A trading signal arises when the first of these lines, the MACD line, crosses the EMA(9). So if the MACD line crosses through the signal line from above, then this indicates a possible reversal to the downside, and vice versa if there is an upward crossover.
Of course this explanation is very simplistic. and you certainly won't be able to generate consistent profits just by trading these crossovers in isolation, but it's a useful indicator to include in your overall trading set-up. Not only does it highlight possible reversals but it also indicates the current trend as well because a rising indicator indicates that the price is trending upwards, and a falling MACD obviously tells you that the price is trending downwards.
Another component of this popular indicator that you may also like to use is the MACD histogram. This is basically a series of bars which tell you the strength and direction of the trend. The direction of the trend is determined by whether the bars are currently above or below the 0 line (and also whether the bars are getting bigger or smaller), and the strength is determined by how large or small the bars are.
Both the basic indicator and the histogram are arguably most useful when used to highlight divergence in the markets. In other words when the price is making new highs, but the indicators themselves are failing to make new highs. This tells you that the trend is starting to run out of momentum, and you should start thinking about trading the reversal if and when it comes.
Whichever way you use these MACD indicators, I would certainly recommend you incorporate them into your trading strategy. Admittedly they are lagging indicators, but they are generally extremely effective and will often provide vital clues as to the future direction of the markets.
