Created by a leading investment manager,successful trader and author of numerous publications by Gerald Appel, the MACD indicator based on Moving Average Convergence / Divergence is perhaps the most unique tool that enters almost any Forex trading platform. MACD indicators can simultaneously be attributed to trend indicators, and to oscillators. The uniqueness of MACD lies in the fact that it is able to generate trading signals both on trend segments of the market and during lateral movement (flat). In addition, the use of this indicator allows you to determine the potential strength of the movement, as well as (with a certain probability) a possible change in the direction of the market.
MACD indicator: description
For the construction of MACD graphs, two methods are used: linear and in the form of a histogram.
Линейный MACD строится на основе трех скользящих average, of which only two are displayed on the graph. Directly the MACD indicator itself is the difference between two exponential moving averages (from the EMA with a smaller period, the EMA with a longer period is subtracted). In order to get rid of random oscillations, the so-called signal line, which is a simple moving average (SMA), is used. And for its construction we use not the price values, but the difference between these two moving averages, only with a smaller period. The default values for EMA are 12 and 26, and for SMA, 9.
The settings can be changed.At the same time, an increase in the values (for example, 21.50 and 12) prevents the arrival of false signals, but does not allow for the timely determination of the market movement. Decreasing the settings (for example, 6, 13 and 5) makes the MACD indicator more sensitive to price changes, however, it leads to more frequent false alarms.
To make it easier to recognize the changethe distance between the lines, a histogram is used, which is the difference between the fast (MACD) and the slow (signal) line. When the fast line is above the slow line, the histogram bars are above the zero line, and vice versa.
It should be noted that in the MT4 trading platform (MetaTrader-4), unlike the same Rumus, only the signal line and the histogram are displayed, the MACD indicator itself is not displayed.
MACD Indicator Signals
MACD line crossing signal line intop down is a clear sell signal. At the same time, the location of the histogram bars below the zero line only amplifies this signal. The MACD line crossing the signal line in the bottom-up direction, on the contrary, is a buy signal, and finding the histogram at a position above the zero line is also a strong signal to open a long position.
The occurrence of a contradiction between the indicationthe indicator and the price chart indicates divergence (“bearish” - if the higher price maximum did not find its confirmation by the MACD maximum - or “bullish” when the lower minimum is not confirmed) and is a sign of a possible change in the trend.
Disadvantages of the MACD indicator
- Both the line indicator and the histogram very often give false signals, especially on hourly charts and less. Therefore, it is better to use them on daily timeframes and higher.
- When forming trend signals, the linear indicator is triggered with a significant delay.
- Because the MACD indicator calculates the differencebetween two moving averages, this value is absolute, not relative. It is therefore difficult to compare MACD levels over relatively long periods of time, especially for those instruments that have changed exponentially.
- Using MACD, it is difficult to determine overbought and oversold levels.
Yet the MACD indicator is recognized as one of the mostreliable technical indicators in the foreign exchange market. Its signals are simple enough to understand and allow you to correctly assess the current situation and timely conclude a good bargain even for beginners.
