MACD, short for Moving Average Convergence/Divergence, is a highly effective and popular technical indicator used to identify market trends. The MACD is a lagging indicator built on historical data and as such it does not predict future price movement.
- The MACD is an oscillating, trend-following indicator built on historical data
- The MACD lags behind actual prices
- The indicator measures the distance between two moving averages
- Traders use the MACD to identify market trends
The MACD is a widely used technical indicator in forex trading. The MACD is a momentum oscillator that measures the distance between two moving average lines. On a chart, it is displayed as two lines that oscillate without boundaries.
The MACD consists of 3 elements:
- MACD line
- signal line
The MACD line is the difference (distance) between two exponential moving averages while the signal line is the simple moving average (SMA) of the MACD line. Note that neither of the two lines represent the moving averages of the price of a currency pair. The histogram graphs the difference between the MACD and the signal line.
The default parameters of the MACD indicator in most cases are 12,26,9 where
- 12 represents the moving average of 12 previous bars
- 26 represents the moving average of the 26 previous bars
- 9 represents a moving average of the difference between the two
The MACD line is calculated by subtracting the value of a 26-period exponential moving average (EMA) from a 12-period EMA.
MACD LINE = 12-PERIOD EMA - 26-PERIOD EMA
The signal line is a 9-period SMA of the MACD and it is plotted on top of the MACD.
Most charting software will allow you to change this default configuration to better match your trading strategy. Speaking of strategy, bear in mind that an indicator such as the MACD in itself does not give you a complete trading strategy.
How can you use the MACD indicator?
Let’s start with a piece of advice: while the MACD is a highly reliable technical indicator, it may still give fake signals. In forex trading, the MACD is usually combined with other indicators and price action and/or fundamental/economic analysis to avoid falling prey to fake signals.
There are multiple ways people use the MACD indicator, in this article, we cover the three main use cases.
Since the histogram is an indication of momentum, the MACD can be used for divergence trading. If the momentum indicator - in our case the histogram - progresses in the opposite direction as the price itself, it suggests a trend reversal in the market.
When the MACD line crosses the signal line from above, it is considered bearish (some call it a sell signal) while the opposite (the MACD line crossing the signal line from below) indicates a bullish trend and is treated as a buy signal.
The MACD indicator has a zero-line. If the MACD crosses the zero-line from below, it is considered a bull signal, and when the MACD line dives below the zero-line it gives a bearish indication.
If you are new to forex trading and want to try technical analysis, we recommend you open a demo account at an online forex broker. Most of the brokers in our list of the best forex brokers provide a demo account free of charge.
What does the MACD indicator tell you?
The MACD is a trend-following momentum indicator. It shows the difference between two moving averages of an asset’s price. Despite being an oscillator, it is not typically used to identify overbought or oversold conditions.
What is the MACD indicator used for?
Traders use the MACD to gain signals, mainly from crossovers and zero-crossing. These signals help traders identify new trends emerging in the market.
Should I use the MACD indicator in itself?
If you want to get more accurate signals and determine entry points for your trades, you should always combine indicators to avoid fake signals. Make technical indicators an integral part of your trading strategy but do not rely on a single indicator to make trading decisions.