MACD Histogram: A Lagging and Momentum Technical Indicator: Part IIAlessio Rastani – Trading for Beginners WebinarTrading the MACD Moving Average Convergence Divergence (Video 1 of 2)

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FX Charts: How To Use The MACD Indicator

The MACD or Moving Average Convergence Divergence indicator is one of the most popular tools on FX charts. It can be used either as an indicator in itself, or as a check when you are mainly relying on other tools.

The MACD chart measures faster and slower moving averages and whether they are getting closer together (converging) or farther apart (diverging).

When they are converging you will see the two lines on the chart approaching each other and the bars on the histogram at the bottom of the chart become smaller. This usually indicates that the current trend is coming to an end or has ended.

Of course the faster line reacts to a change in price movements more quickly than the slower line. So when a new trend forms, the faster line will get closer and finally cross the slower line. If it then separates or diverges from the slower line, this is often an indicator that a new trend has formed.

When the two lines cross, the bars of the histogram will be at zero and then cross their axis so that if they were below the axis before, they are now above it, and vice versa. If a strong new trend is forming, the bars will quickly lengthen in the new direction.

So this crossover could be used as a signal to place an order. You have a buy signal when the faster line crosses the slower line from below, and a sell signal when it crosses from above.

However, there are disadvantages to the MACD which make the crossover unreliable as a self standing signal. The main problem is that even the so-called fast line is significantly behind actual prices because it measures averages of the past prices. So when the market is very volatile, trends could be ending before the MACD crossover marks that they have begun.

Generally the MACD is a better indicator of the strength of a trend than it is of its direction. For this reason some traders ignore the crossover and look instead at the length of the histogram bars. However it is not a good idea to enter a trade on the basis of this histogram (measuring divergence) and then leave it as soon as the price goes against you.

So if you decide to trade the MACD, you should probably use it for both your entry and exit signals. This takes a lot of nerve and experience, and it is not recommended for beginner forex traders. So if you are just starting out, you are probably better advised to base your trading decisions on other indicators on FX charts and refer to the MACD only for background.

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Sunday, July 5th, 2009 Strategy No Comments

FX Technical Analysis: What Is An MACD Indicator

The MACD indicator is one of the most useful tools of FX technical analysis but it is not usually well understood. This is a pity because many traders could probably use it more effectively if they understood it better.

The letters of its name stand for Moving Average Convergence Divergence. It is true that the name sounds rather complicated and unfortunately this is often enough to put people off from wanting to know more. So they only use the very simplest applications without understanding the power of the tool itself.

Like most forex tools, this indicator is used to show us when a new trend is forming, so that we can get in on it and make money. The MACD does this by plotting the relationship between two moving averages.

Settings

The settings are usually expressed as three numbers. Commonly you might see 12,26,9.

Traders using FX technical analysis often make the mistake of thinking that the first number on the MACD indicator (12 in this example) relates to the faster moving average line, the second number (26) relates to the slower moving average line and the third number (9) relates to the histogram at the bottom of the chart. That is not quite correct.

In fact the first two numbers (12 and 26) indicate the number of periods used to calculate two moving averages. The faster moving average line, which is often green on the chart, measures the moving average of the difference between the 12 period and the 26 period moving averages.

The slower moving average line is often red on the chart. This line plots the average of the last 9 (or whatever is the third number) periods of the faster moving average line. It usually shows smoother curves because its effect is to smooth out the fast moving average line.

Divergence And Convergence

The histogram that measures convergence and divergence is the series of blocks stretching above and below an axis near the bottom of the chart. This simply records the difference between the faster and slower moving averages.

As the two moving averages separate from each other (diverge), the blocks of the histogram will become longer. As they get closer (converge), the blocks become shorter. If the two lines cross, the blocks of the histogram will switch from stretching above the line to dropping below it or vice versa.

So the histogram measures the convergence and divergence of the two moving averages. And that is why this tool for FX technical analysis is called a Moving Average Convergence Divergence or MACD indicator.

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Saturday, July 4th, 2009 Strategy No Comments