The MACD is a technical indicator which forex traders commonly use to help with making trading decisions in the currency markets. The MACD is expressed as a separate parallel chart from the currency price chart. The indicator helps traders with determining the strength of trends as well as potential trend reversals.
What Exactly Does the MACD Measure?
The calculations that form the MACD is not complicated. The indicator simply calculates the difference between a currency pair’s 26-period and 12-period exponential moving averages (EMA). The 12-period moving average is the faster moving average while the 26-period average has slower fluctuations. Also, a nine-period EMA of the MACD itself is plotted on the MACD chart, acting as potential signals for selling and buying decisions.
MACD Histogram
The MACD indicator is usually plotted with an accompanying histogram. This serves as a visual expression of the difference between the MACD an its nine-period EMA. When the MACD is above its nine-period EMA the histogram is positive, while the histogram is negative when the MACD drops below its nine-period EMA.
The MACD histogram can be a measure of momentum of a trend. The histogram grows larger as prices begin to rise more quickly while contracting when price starts to slow down. In a downtrend the same principle still applies, however in reverse.
The way forex traders utilize the MACD indicator will vary with each individual trading strategy. However, no matter what MACD strategy one uses it is always a good idea to confirm trade signals with a variety of different technical indicators and chart patterns. Also, keeping an eye on market sentiment and fundamental economic market drivers will help to maximize profits while also minimizing risk.
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Sources:
http://www.investopedia.com/walkthrough/forex/intermediate/level4/macd.aspx
