FX Indicators : Using The MACD Indicator
Moving Average Convergence Divergence indicator or MACD for short is amidst the revered FX chart tools. Two critical utilities for this is to act as a check when adopting other methods or as a stand alone indicator.
The MACD chart determines faster and slower moving averages and whether they are moving closer together (converging) or farther apart (diverging).
Two lines moving towards each other as well as dwindling bars on the bottom histogram symbolizes converging. A harbinger that the current trend is either culminating or has closed.
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Of course the faster line reciprocates to a change in price movements more rapidly than the slower line. Hence, the slower line will be reached and eventually met by the faster line. Whenever the fast line diverges from the slower line, it would connote that there is a new trend.
At the point of intersection of the two lines, the histogram bars must be zero and their axis crossed and their location reversed like if they were above the axis, they would now be under and if they were under, they would now be above. A rapid enlargement of the bars are pointers that novel and vehement trend is now forming.
Placement and features of an order can then be depcicted by this change in direction. You have a buy signal when the faster line crosses the slower line from beneath, and a sell signal when it crosses from above.
But all is not well with the MACD, with some problems rendering it deficient to be the sole trading index. The main difficulty is that even the so-called fast line is significantly, behind actual prices since it computers averages of the past prices. So when the market is very volatile, trends could be concluding before the MACD crossover signifies that they have begun.
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Usually the MACD is a better indicator of the stability of a trend than it is of its direction. Thus a number of traders would be indifferent to the crossover and concern themselves with rating the length of the bars. That said, it is imprudent to use divergence as a signal to buy and to depart on the basis of an adverse price movement.
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In summary, other indicators on FX charts are usually better determinants of buy or sell decisions for fresh traders, reserving the MACD for general market analysis.
Disclaimer: Forex investing is risky, can end up in considerable losses, and is not suitable for every person.