MACD

MACD is another indicator of technical analysis and its name is due to its acronym in English: Moving Average Convergence Divergence (Convergence / Divergence of the Moving averages).

[caption id="attachment_616" align="aligncenter" width="398"] MACD[/caption]

 

This tool is used to identify moving averages that indicate a new trend, regardless of whether it is for buyers or sellers.

After all, our number 1 priority when doing currency trading is to be able to identify a trend, because that is what more money can generate.

[caption id="attachment_617" align="aligncenter" width="503"] MACD[/caption]

 

Which is the macd indicator

When you activate the MACD indicator on your trading platform you will see three numbers:

• The first of these numbers, is the number of periods, is used to calculate the fastest moving average.


• The second is the number of periods used in the slower moving average.


• The third is the number of bars used to calculate the moving average of the difference between the fastest and slowest moving averages.

For example if you see "12, 26, 9" as the MACD parameters, here's how to interpret it:

• The 12 represents the previous 12 bars of the fastest moving average


• The 26 represents the previous 26 bars of the slowest moving average


• The 9 represents the previous 9 bars of the difference between the two moving averages. This is placed in a histogram (series of vertical bars). In the previous graph, we observe it in the blue bars.


• There is a common misunderstanding regarding MACD lines. The two drawn lines are not moving averages of the price. Instead, there are the moving averages of the difference between the two moving averages.

In our example above, the fastest mobile is the moving average of the difference between 12 and 26. The slowest moving average is the mean of the previous MACD line.
This means that we are taking the average of the last 9 periods of the fastest MACD line and placing it as our slowest moving average. What this does is to normalize a little more the original line, which gives us a more accurate line.

The histogram shows the difference between the slow moving average and the fast moving average. If you look at our original graph you will see that as the two moving averages separate, the histogram becomes larger. This is called divergence, because the fast moving average is diverging or moving away from the slow moving average.

As the moving averages approach, the histogram becomes smaller. This is called convergence, because the fast moving average is converging or approaching the slow moving average.

MACD line crossings

Since there are two different moving averages with different speeds, the faster one will logically be faster to react to price movements than the slower one. When there is a trend, the line will react first and eventually cross the slowest line. When this crossing occurs, the faster line begins to diverge or move away from the slow line, this usually indicates that a new trend has formed.

[caption id="attachment_618" align="aligncenter" width="258"] MACD[/caption]

In the chart above you can see how the fast line crosses the slow line and correctly identifies a new downward trend. Note that at the point where the lines cross, the histogram disappears temporarily. This is because the difference between the lines at that time is 0. When the downtrend starts and the fast line diverges from the slow, the histogram becomes larger, which is a good indicator of a strong trend .

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.