MACD for Online Forex Trading

In the past few days I've blogged about technical indicators for online forex trading. Along with moving averages, the MACD is one of the valuable forex trading tools you'll have online.

MACD, which is an acronym for moving average convergence divergence, is a momentum oscillator, meaning that it reflects the strength at which the market is oscillating (remember that the market moves in price swings, or oscillations).  The MACD is one of the most popular technical indicators for online forex trading.

Components of the MACD

First, the MACD includes a line that represents the difference between the 26-period exponential moving average (the slow EMA) and the 12-period exponential moving average (the fast EMA); this line is often referred to simply as the MACD.

Second, the MACD includes a line that represents a 9-period exponential moving average; this line is known as the "signal" or "trigger" line and is used in conjunction with the first line.  

The first indicator that the MACD reveals is based off of those first two lines.  When the MACD (the difference between the fast and the slow exponential moving averages) crosses over the trigger line it offers a buy (bullish) signal.  

When the MACD crosses under the trigger line it offers a sell (bearish) signal in online forex trading.

The smaller circles highlight points where the MACD crosses 1) over the trigger line (the buy signal) and 2) under the trigger line (the sell signal).  As it is in this chart, the MACD is usually represented by a red line while the trigger is usually a blue line.

Another aspect of the MACD indicator is the histogram (which you can see in green in the following screen capture image).  The histogram is a good momentum indicator, offering information about the strength of price movement.  While the histogram does not reveal any direct buy or sell signals, it is a useful tool to use in conjunction with other indicators when analyzing possible reversals (if the market is slowing down it may be headed toward a reversal; this slow down would be reflected by lower bars in the histogram).

The MACD used in Online Forex Trading

A third aspect of the MACD is that it is plotted against a zero line.  In essence, the difference between the fast and slow exponential moving averages is converted mathematically into an oscillator that fluctuates above and below a zero line.

MAC Signals For Online Forex Trading

The MACD gives the following signals that can be used in forex trading online:

1. When the MACD line crosses over the zero line it offers a buy signal.
2. When the MACD line crosses below the zero line it offers a sell signal.

Take a look at the MACD forex chart shot to see these signals.  The two larger circles represent the market 1) crossing under the zero line (sell signal) and 2) crossing over the zero line (a buy signal).

The fourth aspect of MACD is that its trends (swings) can be compared to the price swings (trends) in the online forex trading market.

MACD divergence is when the MACD line is trending (swinging) in one direction while the market is trending in another.

This divergence can offer information about the future movement of the market.  If the divergence is positive (MACD is trending upward while the market is trending downward) the market may be headed toward a rally (that, then, is a buy signal).  

If the divergence is negative (MACD is trending downward while the market is trending upward) the market may be headed for a price drop (that, then, is a sell signal).  

Looking at the movement of the histogram can also reveal divergences between prices and the MACD (the histogram may reveal those divergences before the MACD does).

In addition to the MACD, stochastics are also commonly used in online forex trading. I'll be posting about stochastics in the next rapid forex blog post.

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