Overbought or Oversold? Ask Mac.
The MACD, ( you say: “Mac D” as in McDonalds, – or is that Micky Ds? Some people just say the letters M.A.C.D), is a very useful forex indicator (you’ll often see it on default chart options). MACD is an acronym for Moving Average Convergence/Divergence and was developed by a guy called Gerald Appel. It is one of the easiest indicators to use, but in this case simple really is beautiful. The MACD really comes into its own in wide-swinging markets. This is an oscillator, like the Stochastic indicator and the RSI : the MACD curve heads north and south of zero. There are no upper or lower limits.
What is it?
The MACD graph consists of two lines and a bunch of bar lines . The first line is the MACD Line.
The second line is the Signal Line: an exponential average of the MACD line, (you can adjust the sensitivity of the line depending on the volatility of the markets. It’s normally set at 9 in normal markets and 5 if things are hotting up a bit.
The Signal Line is a smoothed out version of the first. The space between the lines is sometimes shaded in.
Then there is the MACD Histogram, which represents the difference between the 2 lines.
(For the Cone-Heads)
MACD Line: (12-day EMA – 26-day EMA)
Signal Line: 9-day EMA of MACD Line
MACD Histogram: MACD Line – Signal Line
How to use the MACD
You normally use an MACD to as an overbought or oversold signal.
If the MACD is dropping and moves away quickly from its moving average, the price is expected to increase On the other hand, if the MACD is rising and moving away quickly from its moving average, this is a bearish signal.
If the MACD crosses and heads above 0, this is a BUY signal. And if the MACD crosses and heads below 0, this is a SELL signal.
As with many other forex indicator, the cross over is one to watch out for.
If the MACD crosses and drops below its moving average, this is a SELL signal, and if the MACD crosses and goes ahead of it moving average, this is a BUY signal.
If the MACD is going against the current in the opposite direction to the trend, this is a reversal signal. So, for example, if the MACD is dropping while the price of your currency pair is still on the up, then look to SELL. This signal is particularly pronounced if the MACD is making new lows while the price is increasing. On the other hand, if the MACD is heading up while the currency pair’s price is on the way down, then this is a BUY signal, particularly when the MACD is recording new highs while the currency pair price continues to head down. Got it? Practice makes perfect: go and have a play.
Try the MACD out on the charts at the Following Forex Brokers
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