Wednesday, June 07, 2006
Learn Forex Trading - Technical Analysis using MACD Indicator
Learn Forex Trading - MACD indicator
Moving Average Convergance and Divergance (MACD) is one of the widely used indicators in forex trading community. The indicator is calculated on the basis of moving averages. We'll definitely go through Moving Averages tomorrow. Currently please just remember that MACD is based on moving averages.
MACD is calculated by subtracting longer moving average from shorter moving average. The difference is plotted as a line and a second line is also plotted on the basis of another moving average. So the crossing of these 2 lines triggers the buying ad selling signal.
Most common values used for MACD is 12/26/9 . So, here the difference between 12and 26 moving averages is used to plot a line and the second line is a 9 day moving average. The crossing over of these 2 lines is used to identify buying and selling signal.
Now please remember MACD is a lagging indicator which means it generates signal only after an event has happenned.
So, how can MACD indicator be used for forex trading if it signals only after the event has happenned? I use it in forex trading to identify if the trend is changing.
It generates the signal for -
1. Positive Divergence
2. Negative Divergence
What does this mean in forex trading? Please refer to the chart above -
Here a Positive divergence is happenning as you can see that overall chart is making lower lows but MACD is making higher lows. This signifies that the down trend is losing its steam and can change directions anytime.
The opposite is true for negative divergence.
How do I use this indicator for Forex trading??
I use MACD to see if there is any divergence if positive or negative to see if there is any change in trend happenning. So lets say if I decide to go long in forex trading and there is a negative divergence, I do not place trade. And similarly for short forex trading.
So thats all to learn in forex trading today..Tomorrow we'll cover Moving Averages.
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