Moving average convergence divergence is a popular technical indicator in the Forex market. MACD is an important tool that helps investors understand market fluctuations. Thanks to that, you can make accurate trading decisions. Furthermore, using MACD effectively gives investors an advantage and the opportunity to optimize profits from transactions. Join Forex Trading to further explore MACD to improve efficiency in the following article!
What is the concept of Moving average convergence divergence?
Moving average convergence divergence is known by another name Moving Average Convergence Divergence. Or also known as Moving average convergence divergence. This is considered one of the most popular and popular technical indicators in Forex. MACD can be determined by the difference between two exponential moving averages. The cycle of these two lines is usually 12 days and 26 days.
Besides, understanding what is moving average is will also help you understand the Forex market better. The MA line, the abbreviation for Moving Average, is a moving average line calculated by taking the average of a series of prices over a certain period. Typically, MA lines are used to reflect the price of an asset. Or it could also be an index over a certain period.
Formula to calculate Moving average convergence divergence
MACD will be calculated using the following formula:
MACD = EMA(12) – EMA(26)
If the 12-day moving average is greater than the 26-day moving average, MACD will be positive. Conversely, if the 12-day moving average value is less than the 26-day moving average value the MACD Indicator will have a negative value.
What is the structure of the MACD indicator line?
The structure of MACD includes 4 main components: Moving average convergence divergence, signal line, Histogram chart, and Zero line. Each component has its meaning and characteristics.
- Moving average convergence divergence: Determines the price trend of the market, calculated by the difference of two exponential average lines EMA (12) and EMA (26).
- Signal Line: This is the EMA (9) exponential moving average of MACD. This line generates a signal of a potential reversal when combined with MACD.
- Histogram chart: Reflects divergence and convergence, determined by the difference between Moving average convergence divergence and the Signal line.
- Zero Line: The battle line helps investors evaluate the strong and weak trends of the market.
See more: MACD Trading Strategy: effective Forex trading x3 time
Some advantages and disadvantages of the Moving average convergence divergence
Strengths of Moving average convergence divergence :
- Simple and easy to use: Based on simple averages, easy to understand and use. Helps investors easily apply in analysis.
- High accuracy: Provides more accurate buy and sell signals than many other tools. This helps investors make accurate trading decisions.
- Easy to customize: Allows parameter adjustment such as time cycle. This is suitable for each investor’s trading strategy, increasing flexibility.
- Sensitive to price fluctuations: Good reflection of stock price fluctuations, helping investors identify price trends and make timely trading decisions.
Meanwhile, some limitations of MACD are:
- Slow signals: MACD can provide slow signals, leading to missing important trading opportunities.
- Fake signals: Short-term fluctuations can create fake signals, requiring caution to make correct trading decisions.
- Easily affected by price fluctuations: When stock prices fluctuate widely, MACD may not be effective in assessing price trends and trading signals.
How to recognize the Moving average convergence divergence in Forex?
- Investors can easily recognize the MACD indicator line through its color: Moving average convergence divergence is blue, while the signal line is red.
- When MACD is positive, the short EMA will stand above the long EMA. The larger the distance between these two lines, the more positive the Moving average convergence divergence will be. This means the market’s increasing momentum.
- Conversely, when MACD is negative, the short EMA will be below the long EMA. The larger the distance between these two lines, the more negative the MACD value becomes. It will indicate a clear downtrend is imminent.
- The analysis of EMA lines is based on their position and movement: when two lines move away from each other, it is divergence, and when two lines move close together, it is convergence.
How to use the MACD indicator in Forex
MACD can be used in the following ways: crossovers, overbought/oversold zones, and divergences.
Intersection point
A basic way to use MACD is to sell when MACD falls below the signal line. Then buy when MACD rises above the signal line. Buy or sell signals can also appear when MACD crosses above or below zero.
Divergence
A sign that the current trend is about to end is when the MACD diverges with the stock price. Bearish divergence appears when MACD creates a new bottom while price does not. Bullish divergence appears when MACD establishes a new peak while the price does not. Both types of divergence give the most reliable signals when they occur in overbought or oversold areas.
Combine Moving average convergence divergence with reversal candlestick pattern
These methods are considered the most effective applications when trading with the MACD indicator. Specifically, investors can consider placing sell orders based on the following points:
- When an uptrend lasts, it creates continuous lows and highs.
- Detect divergence after the Doji candlestick pattern is formed.
- Reversal candlesticks at the top may appear at the same time.
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Use the Moving average convergence divergence in combination with other indicators
So it can be seen that MACD has many different uses. Besides, MACD can also be used with other indicators such as:
MACD indicator combined with Stochastic indicator
The Stochastic indicator, created by Dr. George Lane – a technical analyst and trader in the 1950s, is still popular and widely used by investors as a tool. Reliable technical analysis
Stochastic measures price momentum by comparing a stock’s closing price to its price range over a certain period. It always changes direction before price and fluctuates on the following basis:
- When prices rise, the closing price is usually near the upper boundary of the price range.
- When prices decline, the closing price is usually near the lower boundary of the price range.
MACD with RSI indicator
Moving average convergence divergence is often used to analyze the relationship between two EMA lines, while RSI focuses on measuring near-term price changes. When combined, both indicators provide analysts with a more complete overview of the Forex market.
Although both the MACD and RSI measure momentum in the market, they focus on different factors, which can lead to conflicting signals. However, when both give the same signal, their reliability level is high, helping investors feel secure when making trading decisions.
Conclude
To use Moving average convergence divergence effectively, investors need to be sensitive to the market. This requires a lot of experience, learning, listening to advice, and sharing with experts. Hopefully, the above article has provided more useful information to help you identify trends. From there, decide when to buy or sell appropriately. Please continue to follow Forex Trading useful knowledge to be able to make more accurate decisions.
FAQs
How do traders use MACD?
MACD helps traders identify changes in the direction or strength of a stock’s price trend. Based on exponential moving averages (EMA), MACD is a tool that helps detect recent momentum in stock prices.
Is MACD a leading or lagging indicator?
MACD lags price because the data is based on a stock’s historical price movements. However, some traders use MACD to predict future trend changes as a first indicator.
What is the MACD bullish or bearish divergence?
MACD positive divergence occurs when the MACD fails to make a new low, even though the stock price is lower than before. Conversely, negative divergence occurs when the stock price is higher but the MACD cannot create it. This is also considered a bearish signal. Both of these situations suggest that the trend will not continue.
