subject: How To Use The MACD Indicator For Great Profits [print this page] How To Use The MACD Indicator For Great Profits
Not many forex traders know how to use the the MACD indicator successfully while trading forex. The MACD (Moving Average Convergence-Divergence indicator) is a trend following indicator which is used for technical analysis. It was developed by Gerald Appel. A lot of traders do not know how to use the MACD correctly. It is one of the most reliable indicators. The MACD indicator can be used to gauge the strength of the price movement as well as to determine the direction of a trend. It shows the relationship between two moving averages of price (usually the close price). The MACD line is calculated by taking the difference between a longer-period and shorter-period exponential moving average. It is the interaction of these two moving averages that gives the indicator its name.
Over time, the two moving averages are constantly converging and diverging. Exponential averages are used because they respond more quickly to changes in price, since more weight is placed on the most recent price compared to the earlier prices.
The MACD fast line is calculated by taking the difference between two Exponential Moving Averages (EMAs) - traditionally the 12 and 26 period EMAs. The MACD signal line is an EMA of the MACD fast line (which traditionally uses 9 period EMA of the MACD fast line). A sell signal is generated when the MACD crosses below the signal line, and a buy signal is generated when the MACD crosses above the signal line. In addition, the locations of these crossovers in relation to the zero line are helpful in determining buy and sell points. Bullish signals are more significant when the crossing of the MACD line over the signal line takes place below the zero line. Confirmation takes place when both lines cross above the zero line.
You can experiment with the periods used for the MACD . In addition to the traditional (12, 26, 9) that was originally proposed by Appel, you may try shorter periods for shorter time-frame trading. The MACD also indicates if market is overbought or oversold. When it is overbought, it too is risky to go long and when it is oversold, it is risky to go short. When market is overbought, Bulls (buyers) can start collecting their profit (they sell) at any time and so the price goes down and when market is oversold, Bears can start buying at any time and so the price may go up. So going against MACD is dangerous.
You can make great profits when you use the MACD as a confirmation of your forex trade. That is, you have to use it in combination with other reliable indicators to get great profits.
