Success in Forex trading depends greatly on the accuracy of the trader’s analysis, and to make this possible there are so many available forex analysis tools, one of which is Moving Average Convergence Divergence (MACD). MACD is used for the indication of moving averages of both bullish and bearish trends.
WHAT IS MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD)?
MACD is an indicator that indicates the relationship between two average prices that are on motion thereby displaying trend movement, it is calculated by finding the difference between the 12 day exponential moving average (EMA) and the 26 day exponential moving average (EMA), A signal line which is a 9 day EMA that is of the MACD is used to make a plot on the MACD and it serves as instigator for the buying or selling signal.
METHODS OF MOVING MACD
Moving average convergence divergence (MACD) is basically interpreted using three methods. They are as follows;
While using MACD analysis, a bearish signal is observed when the MACD falls below the signal line indicating a good period to sell, also when there is a rise of the MACD above the signal line; it indicates a bullish signal which may infer asset price may increase.
Divergence mainly helps signal the end of a current trend, this occurs when the security price moves away from the MACD.
- A DRAMATIC RISE:
A normal level is signaled when the MACD rises dramatically, that is when there is a pull away by the shorter moving average from the longest moving average.
To detect the location of the short term average relative to the long term average, traders look out for a move above or below the zero line.
THE MACD HISTOGRAM
The MACD histogram gives a visually representation of the of the MACD and it 9 day EMA, the histogram can be read as positive if the MACD is above the 9 day and if the MACD is below the 9 day EMA, the histogram is read negative. The histogram increases with the high speed of the price, this signifies that the price is in the uptrend, and the histogram grow smaller as there is a slowdown in the movement of the price.
The MACD histogram is used by traders to detect the momentum, as it gives a pictorial representation of the speed of price movement that is why the MACD is used mostly for the measurement of the strength of a price move rather than currency trend or direction.
One of the strategies used in trading with MACD histogram is known as trading divergence, which is when a trader identifies o the chart points where there is a new swing high or low of the price and the MACD histogram does not swing, which signifies a divergence between the momentum and price
Using the MACD Forex analysis tool is quite specific and easy, but a trader still needs to study the technique properly before using it in trading to avoid lost of capital and for maximization of profit.
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