MACD is a popular technical indicator in Forex trading. It measures the difference between two moving averages. MACD can predict price changes early and help determine exact entry points. Join Forex Trading to learn What is MACD , how to use it and the meaning of the MACD line through the following article. Stay tuned until the end for more effective trading information.
Overview information about What is MACD?
With outstanding advantages, MACD has become an effective support tool for investors. However, it should be noted that MACD is a lagging indicator and is for reference only. Let’s learn specifically about What is MACD in this section.
What is MACD?
MACD is the acronym for Moving Averages Convergence Divergence. Created by investment expert Gerald Appel in 1979, the MACD line is a technical indicator. It reflects market fluctuations, assisting investors in identifying buy and sell signals. To calculate MACD, investors need to compare the difference between two moving averages (EMA) for 12 and 26 days.
Components What is MACD?
The structure of MACD includes MACD line, signal line and MACD histogram.
- The signal line reflects price momentum, creating buy/sell signals.
- The MACD line measures the distance between two moving averages.
- The MACD Histogram shows the difference between the MACD Line and the Signal Line.
See more: MACD Trading Strategy: effective Forex trading x3 time
How to recognize What is MACD on Forex chart?
What are the recognizable signs of MACD in trading? To identify the MACD indicator line, investors can rely on the colors: the MACD line is blue and the signal line is red.
- When MACD is positive, the short EMA is above the long EMA. The distance between them represents an increase in positive value.
- When MACD is negative, the short EMA is below the long EMA. Large distances indicate sound attenuation. This is a bearish signal.
- The difference and direction of the EMA’s movement determine divergence or convergence.
How to install MACD indicator on MT4
After downloading Metatrader 4, do this step to install MACD:
- Step 1 : On MT4, select Insert > Indicators > Oscillators > MACD to add.
- Step 2 : Adjust parameters and customize colors and strokes in the Signal box. Click OK to complete.
Notes that investors need to pay attention to when using What is MACD ?
- Divergence/convergence can detect a change of direction but can also create false signals and cause losses to the trader.
- Each trader can adjust the MACD indicators to their liking and purposes, resulting in variable results depending on personal preferences. This means that the MACD line may not fully reflect reality.
- MACD indicators can cause delays in moving average crossovers, resulting in signals being generated that can also be slower than the market trend.
How to use the What is MACD line?
MACD is one of the most important and popular tools in technical analysis. So what are the effective ways to use the MACD line to help you recognize trading signals? Let’s find out now.
Trade when the Signal line crosses MACD
When the MACD line and the Signal line intersect is the most basic signal in forex.
- When MACD cuts Signal from above, the market drops, so sell.
- On the contrary, when MACD cuts Signal from below, it is a sign that the market will increase, so you should buy.
Trade when the Histogram line changes from + to – and vice versa
The calculation is: Histogram = MACD Line – Signal Line.
- Based on this formula, when the Histogram changes from red to green, the market is increasing, place a buy order.
- Conversely, if the Histogram turns from positive to negative (green to red), place a sell order.
Trade when the MACD line changes from – to + and vice versa
When using the MACD line for technical analysis, traders need to pay attention to MACD’s relationship with the Zero axis.
- When MACD crosses Zero from below, it is a bullish signal, one should buy.
- On the contrary, if MACD crosses Zero from top to bottom, the market is showing signs of decline, so you should sell.
Trade when the MACD indicator creates divergence/convergence
Trading when MACD diverges/converges in an uptrend is a way to see a gradual weakening in the price trend, a sign of an impending reversal. Traders need to wait for MACD divergence/convergence to appear and wait for a confirmation signal from the crossover point of the MACD line and the signal line. Draw uptrend lines and only trade when divergence/convergence appears. Place sell orders when the price trend reverses and use support and resistance levels to increase accuracy.
In a downtrend, the steps are similar but you need to consider whether the price is increasing or decreasing, MACD is converging or diverging, and how the Histogram line is moving.
How to combine MACD with reversal candlestick patterns
This is considered the most effective method when trading with the MACD indicator. Investors can consider placing sell orders based on the following points:
- When the trend continues to increase and new bottoms and tops appear.
- Divergence appears after a Doji candlestick pattern is formed.
- Simultaneous appearance of reversal candles at the top.
- When all three of these things happen at the same time, it is a sign that the buyers want to push the price high but are overwhelmed by the sellers and cannot continue to push the price.
Use the MACD line in combination with other indicators
MACD combined with Stochastic
Stochastic is a momentum measurement indicator created by George Lane and is still popular and recognized. Stochastic measures price momentum, comparing closing prices to price ranges over a given period. When the price increases, the closing price approaches the upper boundary, when the price decreases, it approaches the lower boundary.
Combining Stochastic and MACD will help investors evaluate the market price more accurately. Stochastic compares the closing price with the price range, MACD is formed from two moving averages that create divergence/convergence.
- When Stochastic and MACD combine above level 10, the signal is overbought
- Conversely, when it is lower than -10, the signal is oversold.
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Combine MACD with RSI
What is the benefit of combining MACD with RSI? These two indexes provide a more comprehensive and complete view of the market. Although both measure momentum, their direction and measurement factors are different, but when the signal is consistent, the level of confidence is high. MACD and RSI are two indicators that complement each other, RSI predicts price trends, MACD helps find accurate entry points.
Conclude
The MACD line is an effective support tool for Forex investors, helping to identify trends, measure momentum and find potential buy/sell points. However, it is necessary to use MACD in combination and with caution to get the best trading efficiency. This article has compiled knowledge about What is MACD and strategies for using the MACD line. Hope you will be successful in your trading strategies. Don’t forget to visit Forex Trading to update more useful information about successful trading knowledge and tips.
Frequently asked questions
How to read and understand MACD chart?
The MACD line runs above the 0 average line and buy/sell signals are generated when the MACD line crosses above or below the signal line. The distance between the two lines also provides information about the strength of the trend.
Is there a way to distinguish strong and weak MACD signals?
Strong MACD signals are often accompanied by a large widening between the MACD line and the signal line, while weak signals have a smaller gap and may have little volatility. This is often combined with trading volume for evaluation.
How to identify accurate buy/sell signals with MACD?
The exact buy/sell signal is usually determined when the MACD line crosses the signal line from bottom up or top down. This is often accompanied by a widening or narrowing between the two lines.
