If you have been trading for a while, you must have come across the Moving Average Convergence Divergence (MACD) indicator. It is considered to one of the most versatile indicators and is highly popular amongst pro traders. MACD can help you in determining the strength of a trend as well as possible turning points in the market. It also helps in determining when the momentum is increasing and decreasing. 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 are 12,26 and 9. MACD is the difference of the 26 day EMA with the 12 day EMA. This is plotted as the black or dark line on the MACD chart.
The change of the two moving averages either closer to or further away from each other have predictive value. As the two moving averages approach each other in value, a potential crossover maybe forming. This means the current trend is losing momentum by slowing down and the market may be getting ready for a trend change. Similarly, as the trend strengthens, the two moving averages grow further apart indicating an increase in momentum.
MACD chart comprises of a histogram in addition to the line chart. The MACD line is colored dark and usually is black while the trigger or the signal line is colored light usually grey. When these two lines come close, it indicates the weakening of the trend and when they move further apart, it means the trend is gaining strength.
When the bars move away from zero, it indicates the momentum is increasing and when the bars move towards zero, it means the momentum is decreasing.Try these Forex Signals by two top gun traders in a friendly competition. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade.