MACD Forex Trading Systems
One of the popular tools that forex traders use is the MACD. This system works on fairly simple calculations of the market. The MACD calculated the difference between the 26 and 12 day exponential moving averages for a currency pair. The calculation uses the closing prices of both EMAs for the period being measured. With MACD forex trading systems a chart is included with a 9 day EMA which order as the signal for buying and selling. The buy signal from the MACD comes when the price moves above the 9 day EMA and the sell signal comes when it moves below the EMA.
The Visual Representation
The visual representation of the MACD is the MACD histogram. The histogram depicts the difference between the MACD and the 9 day EMA. When the histogram is in a positive range then the MACD is above the EMA. However, when the histogram is in the negative area the MACD is below the EMA. The histogram grows bigger when there is an uptrend as the prices start to rise faster.
The MACD histogram is often used by traders to identify momentum on the market as it provides a visual representation of the speed of movement. Most traders will use this chart to measure the strength of the price instead of the trend or direction of the currency.
Trading Divergence Forex Trading Systems
One of the classic forex trading systems using MACD histograms is to trade on the divergence. Trader use charts to identify points where a price is going to swing higher or lower. However, the MACD allows signals in divergence between momentum and price. The main problem with this trading system is that it is not very accurate or reliable and fails more often than it wins. Currency prices generally have a number of bursts up and down which trigger a traders stops before the price takes the anticipated turn.
One of the main reasons why traders lose money with this system is that they open a position based on the MACD signal. However, they exit based on price movement. As the MACD histogram is not the price but rather a derivative this system mixes the signals for entry and exit.
MACD for Entry and Exit
For traders wanting to use the MACD histogram there is a way to resolve the entry and exit point inconsistencies. By using the histogram to determine both the entry and exit points you are likely to get a more accurate result. To do this a trader working with the negative divergence should take a partial short position at the initial divergence point. The stop should not be placed at the nearest high swing, but rather the high of the MACD histogram which exceeds the high swing it previously reached. If the new swing is not reached then the trader can add to the initial position and average a higher price on the short position.
Using the MACD system for trading is done by a number of traders. Of course, you have to be careful when doing this because the MACD histogram is not a representation of the actual price but rather the momentum of the market.
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