Forex Futures Trading

Forex Basic: MACD

-Moving Average Convergence Divergence (MACD) was originally built by Gerald Appel an analyst in New York. Originally designed for the action analysis of trends, it is now widely used in many markets. MACD is constructed with an average of the difference between two moving averages. The difference the original two moving averages and moving average of the difference can be drawn two lines, one fast and one slow.

Most graphics software modern now includes MACD as standard. Once selected to display in your charting software that is usually displayed as two lines on the open scale against the zero line. These two lines will normally be of different colors or a line a solid line and the other a dotted line. Common values used are 12 and 26 period exponential moving averages with 9 period exponential moving average signal line.

Although there are three moving averages ve mentioned are only two lines. The easiest method to use is when the two lines cross. If the faster line crosses the signal over the slower line then a buy signal is generated and vice versa. Also used as an indicator of overbought and oversold. The higher above the zero both lines are the most overbought and becomes lower below the zero line both lines are the most oversold it becomes.

This also can lead to a stronger signal if the signal line crosses down when it is overbought and oversold when it crosses. The last common use of MACD is that of divergence.

If the MACD is making new lows and the price of security is not making new lows that is one form of divergence (bullish divergence). Also, if the MACD has made a stop and begins to head down but price continues up to be another type of divergence (bearish divergence) and may lead to an indication a change of address.

I like to use the MACD as a trend indicator with parameters set at 8 and 18 period exponential moving averages with a period of 9 exponential moving average signal line. All I'm trying to do is establish a trend in a longer period than I the intention to trade.

If you were trading day charts would be watching the weekly MACD. If traded with a graphic of an hour can watch the MACD on the daily. While the signal line remains above or below the MACD line in the top frame next time you know the trend is in place.

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