Developed by G. Appel in the 1960s, MACD (Moving Average Convergence/Divergence) is a very popular technical indicator designed to identify trend changes and is often used to confirm trends in forex trading systems.
It shows the difference between a fast and slow exponential moving average (EMA) of closing prices. Fast means a short-period average, and slow means a long period one. The standard periods used are 12 and 26 days.
MACD consists of three components:
Signal line - the 9 day EMA of the MACD line
MACD line - the difference between the 12 and 26 period exponential moving average (EMA)
Block histogram - the difference between the MACD and the signal line
Formulas
The signal line is formed by smoothing MACD with a standard period 9EMA.
Trading Signals from MACD
There are two popular ways to use the MACD indicator: Crossover signals and Positive/Negative Divergences.
MACD line crossing the signal line
MACD line crossing zero
Positive and Negative Divergences
Crossover Signals
1) MACD line crossing the signal line:
The basic Moving Average Convergence/Divergence (MACD) trading rule is to BUY a currency pair when the MACD rises above its signal line. Similarly, a SELL signal occurs when the Moving Average Convergence/Divergence falls below its signal line.
Crossovers signals can often generate false trading signals, it is recommended to use them in conjunction with other technical analysis tools.
2) MACD line crossing zero
It is also popular to buy/sell when the MACD goes above/below zero line and into positive/ negative territory.
Positive and Negative Divergencesbetween price and MACD
Positive divergence between MACD and price arises when the Moving Average Convergence/Divergence indicator begins to advance or making new highs while prices fail to reach new highs or even make a new lower low.
Negative divergence between MACD and price arises when the MACD is declining or making new lows while currency prices advances or moves sideways. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.
Summary
MACD Bullish Signals
Positive divergence
Bullish moving average crossover
MACD Bearish Signals
Negative divergence
Bearish moving average crossover
Note: Positive and negative divergences are probably the least common of the two signals, but are usually the most reliable. It is recommended to use MACD in conjunction with other technical analysis tools such as candlestick patterns to make a complete forex trading system.
