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What is the MACD Indicator?

The Moving Average Convergence Divergence (MACD) indicator helps traders quickly identify short-term trend directions and reversals in the forex markets. You can use the MACD indicator to determine a currency pair price trend’s severity and measure its price’s momentum and even identify the bearish and bullish movements in the currency pair prices. In this article, we discuss everything you need to know about the MACD indicator and how you can make the most of it.

What is the Moving Average Convergence indicator?

The Moving Average Convergence Divergence indicator depicts the relationship between two different moving averages of a currency pair’s price. It helps in analyzing the currency pair’s price strength, weakness, direction, and momentum in the forex market. The MACD indicator identifies the highest upward and lowest downward trends. With the highest upward trend, the ideal exit point can be identified and with the lowest downward trend, we can get the ideal entry point in the forex market.

How is the MACD calculated?

The MACD indicator is calculated by subtracting two exponential moving averages (EMA) belonging to the 26-period and 12-period. Formula: MACD=12 EMA-26 EMA EMA = [price value today*(smoothing/1+days)]+Yesterday’s EMA*[1–(smoothing/1+days)]
smoothing = weight provided for the EMA calculation, generally assumed as 2. When the difference between the two exponential moving averages is found, it is referred to as the MACD line. Another 9-period EMA of the same MACD is called the signal line, which can be plotted on top of the MACD line.

  • You can buy more of the currency pairs when the MACD line crosses the signal line from above. This is also called a bearish signal.
  • You can sell more of the currency pairs when the MACD line crosses the signal line from below. This is also called a bullish signal.

How does the MACD work?

The difference between the 12-day EMA and 26-day EMA is plotted on the MACD histogram. Bearish and bullish momentum in the Forex market can be identified by the MACD line’s movement above and below the zero line.

MACD Indicator graphic MACD Indicator graphic

Top MACD trading strategies

MACD Crossover

Crossovers help in estimating the currency pair’s performance in the forex market and forecasting future prices as well as trends. You can use the MACD indicator to identify entry points in the market when it crosses the slower line, also called the signal line from above. The crossover strategy is one of the most common MACD trading strategies, and it can be used by beginner traders easily. Possible entry points opportunities are always identified at the crossover, highlighted as vertical green lines in the picture below. However, when trading with the MACD indicator, you must be aware of the false signals as well. The best way to avoid any false signals is to wait for a price movement to occur before you take any decision, but not keep waiting for too long. If you wait for too long after the price movement occurs, the currency pair price could reach its reversal point and send you a false buying signal.

Histogram reversals

The MACD histogram increases in height during a strong market trend and shrinks in a slow market. The histogram reversal trading strategy can help you place successful trades even before the actual market movement takes place. When two countertrend moves (first an upward trend, then a downward trend or vice versa) occur in the histogram, it ensures a trend reversal happening soon. If you place your trades in the direction of the market, you can earn significant profits. This is because once the price goes through a counter-trend, it remains in the same trend for a while. This situation can be used in your favor by either moving along with the trend or exiting the market at the right time to mitigate losses.

  • If you see the price movement of a currency pair in the MACD histogram first increasing and then decreasing, it sends you an exit signal in the market to protect you against losses.
  • If you see the price movement of a currency pair in the MACD histogram first decreasing and then increasing, it sends you an entry signal in the market to maximize your profits.
Zero crosses

The zero cross trading strategy refers to either of the two EMAs crossing the zero line at some point. Whenever the MACD line crosses the zero line from above, it sends a buy signal to traders. Whenever the MACD line crosses the zero line from below, it sends sell signals. In this particular strategy, you can see several trendline breaks, which you can use to exit a trade. In this particular strategy, you also see several trendline breaks, which is a signal for you to exit the trade immediately if you want to minimize your losses.

  • You can use a break below the last swing low during an uptrend to exit a trade.
  • You can use a break above the last swing high during a downtrend to exit the trade.

Identify ideal trading opportunities with the MACD indicator

Trading with the MACD indicator helps you detect any change in the currency pair price’s fluctuation in the stock market. It enables you to identify the right entry and exit points to make profitable trades. Since it is based on historical data, it can also be used to predict trend changes and take further positions accordingly. With Blueberry Markets, you can combine the MACD indicator with several other indicators to make sure that you always place successful trades.

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