The MACD indicator is applied in technical analysis of the foreign exchange market. Understanding MACD helps investors analyze and predict market fluctuations. At the same time, you can also identify potential buying and selling points to optimize profits. So what is MACD? Let’s learn about the meaning and how to use this indicator with Forex Trading through the article below!
General information about MACD indicator
One of the commonly used technical analysis tools in the foreign exchange market is moving average convergence divergence. If you are just starting out and still confused about the concept of the MACD line, join us to find out right away.
What is the concept of the MACD line?
The MACD indicator, short for Moving Average Convergence/Divergence, is a popular technical indicator in the foreign exchange market. Mainly used to analyze trading trends. It provides information about the strength, direction, momentum, and duration of price trends. MACD helps identify potential buy and sell points in the market. Based on traders’ psychology and price movements. By comparing the difference between two moving averages, usually EMA 12 and EMA 26.
MACD indicator calculation formula
MACD indicator = EMA(12) – EMA(26)
EMA(12) and EMA(26) are moving average indicators that calculate the average of prices over a 12-day and 26-day period respectively.
- When the 12-day moving average value exceeds the 26-day moving average value => MACD index will be positive.
- Conversely, if the 12-day moving average value is lower than the 26-day moving average value => the MACD index will be negative.
See more: MACD Trading Strategy: effective Forex trading x3 time
Analyze the structure of the MACD indicator
Indicator MACD is a quartet of 4 timelines based on historical stock price data. Include:
- MACD line = EMA (of 12 periods) – EMA (of 26 periods)
- Signal line = EMA (9 periods) of MACD line.
- Histogram = Difference between MACD line and Signal line.
- Zero Line: is a reference line that helps investors evaluate the strength/weakness of the market trend.
When the MACD indicator and the signal line intersect, it is often a sign that a change in trend direction is imminent.
How to effectively use the MACD indicator
Below are some effective ways to use the MACD indicator that you can apply.
Trade when MACD indicator and Signal cross each other
Here are the basic and simple principles that traders need to remember when using MACD:
- When the MACD line intersects the Signal line from top to bottom => The market is trending down => Investors should consider placing a sell order.
- When the MACD indicator intersects the Signal line from the bottom up => The market is trending up => Investors should consider opening a buy order.
MACD trading strategy when Histogram changes from negative (-) to positive (+) and vice versa
Based on the formula to calculate Histogram = MACD Line – Signal Line, we will have an effective MACD trading strategy as follows:
- When the Histogram chart changes from negative to positive value. That indicates that the market is in a bullish phase. Therefore, investors can consider placing buy orders.
- When the Histogram chart changes from positive to negative value. This sign shows that the market is falling. Therefore, placing a sell order can be a reasonable choice for investors.
Trade when MACD indicator changes from negative (-) to positive (+) and vice versa
In trading, investors need to link the MACD indicator and the Zero line:
- When MACD crosses the Zero line from below => The market shows signs of price increase => Which recommends investors place buy orders.
- When MACD crosses the Zero line from top to bottom => The market shows signs of price decline => Which suggests investors should place a sell order.
Trade when MACD and Signal create divergence/convergence
In an uptrend, when the new high price surpasses the previous high, but the MACD is lower than the previous high. Showing signs of weakening in the uptrend and the possibility that the market will reverse. Therefore, investors should consider reducing stock proportion to preserve capital and profits.
In a downtrend, when the new low is lower than the previous low, the MACD peak is higher than the previous peak. This indicates that the downtrend is weakening and there is buying pressure. Investors can consider opening orders at a reasonable bottom point and consider using other indicators.
How to use MACD indicator in combination with other technical tools
The MACD indicator is a popular technical analysis tool. However, MACD should be used in combination with other technical tools.
MACD trading strategy Combined with candlestick reversal patterns
Combining the MACD indicator with the candlestick reversal pattern creates more reliable trading signals.
Investors can use the following factors to make buy/sell decisions:
- In a prolonged uptrend, investors can recognize that the market is about to enter a recovery phase. Based on the appearance of reversal candlestick patterns such as Doji, Hanging Man,… Combined with divergence signals from MACD, investors can believe that a trend reversal is approaching. Therefore, they may consider placing a sell order.
- Similarly in a downtrend, investors can consider placing buy orders at the bottom. When there is a divergence signal from MACD candlestick reversal patterns appear at the bottom.
Combine MACD indicator with RSI indicator
The RSI, or Relative Strength Index, is a tool for analyzing the foreign exchange market. Measures the difference between the average increase rate and decrease rate over a given period. This reflects the overbought or oversold condition of the market.
Meanwhile, the MACD indicator observes the correlation between two EMA lines with periods 12 and 26. Helps investors determine price trends and the correct time to enter orders.
The combination of these two indicators provides a more detailed overview of market behavior. When both reflect the same signal, the price movement forecast becomes more reliable.
See more: Optimize trading with IC Markets Exchange
Combine MACD indicator with Stochastic
Stochastic is used to evaluate price fluctuations. Specifically, comparing the closing price of a currency with its price range over a specific period. It provides trading signals based on the following principles:
- As prices rise, the closing price usually approaches the upper boundary of the price range.
- When prices decline, the closing price usually approaches the lower boundary of the price range.
Using Stochastic and MACD together helps investors analyze more accurately.
- When the combined indicator of MACD and Stochastic is higher than level 10 => overbought signal => Consider selling.
- When the combined indicator of MACD and Stochastic is lower than -10 => oversold signal => Consider appropriate buying points.
Conclude
Above is all the information about MACD indicator analysis in forex trading. Hopefully, traders can determine the up or down trend and choose a reasonable buy or sell point. Please continue to follow Forex Trading to learn more knowledge in the field of financial investment!
Frequently asked questions
How does MACD work?
MACD measures the difference between two EMA lines. When the short-term EMA moves above the long-term EMA, the MACD increases, indicating an uptrend. When the short-term EMA moves below the long-term EMA, the MACD drops, indicating a downtrend.
Which trading time frame is MACD suitable for?
MACD can be used for many timeframes from short-term to long-term. However, the effectiveness of MACD can vary depending on the trading time frame.
Risks when using MACD?
MACD can give false signals, especially in highly volatile markets. MACD can be misleading if not used in conjunction with other technical tools. Default MACD may not be suitable for all markets and trading timeframes.
