The MACD technical indicator is a versatile indicator with various different strategies forex traders can choose from. The various trading strategies utilize the different components of the MACD indicator in order to produce potential bullish and bearish signals. Each strategy has its advantages and disadvantages. Which strategy a forex trader uses will depend on his or her overall trading style and risk tolerance.
MACD Crossover Strategy
One trading strategy utilizing the MACD indicator is known as the crossover strategy. In this strategy a forex trader will monitor the MACD line and the MACD’s nine-period Exponential Moving Average (EMA). When the MACD line moves above the EMA, this is considered a bullish signal and a potential signal to buy a currency pair. It is considered a bearish signal and a potential signal to short a currency pair when the MACD line moves below the EMA.
MACD Histogram Momentum Strategy
The MACD histogram is commonly used by forex traders to gauge the momentum of a current trend. This gives the trader a visual representation of the rate of the price fluctuations. Some traders only use the MACD as a measure of a price movement’s strength, rather than the direction of a current trend in the forex markets.
Trading Divergence with MACD Histogram
One of the most common MACD trading strategies is trading divergence. This means identifying points on a currency chart where price forms a new high or a new low but the histogram on the MACD does not. This signals divergence between the price movement and momentum which suggests there may be an oncoming reversal of the trend. However, this strategy is known to be unreliable and can commonly produce false divergence signals due to several final volatile price movements up or down that causes stops to be triggered.
Most things in forex trading are not clear cut. There are no foolproof ways for traders to predict future market price movements. This is why forex traders need to make sure to practice proper risk management strategies, which can include setting appropriate stops and controlling position sizing.
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Sources:
http://www.investopedia.com/walkthrough/forex/intermediate/level4/macd.aspx
