Traders use different technical analysis tools for arriving at correct and timely decisions while trading in highly volatile forex market. One such popularly used technical indicator is MACD. In this article below we will discuss about important concepts about this great technical analysis tool.
MACD consists of some important components that are very essential for every trader to understand before applying this tool in live market. The first component consist of MACD line that depicts difference between twelve (12) period EMA and twenty six (26) period EMA, depending upon the time interval used by the trader. Second most important line is the MACD line that represents nine (9) periods EMA of the MACD line (above). Finally the last essential factor is the MACD Histogram. It gives us the value of differences between MACD and MACD line (signal).
Using MACD MA crossovers in Forex:
This is the most basic or primary method in Forex that is used to interpret this unique technical indicator. Here when the shorter term EMA which is 12 period crosses over the longer term, that is usually 26 period, then traders assumes a buy signal. Trader must always remember that in the MCAD line, only 12 and 26 periods EMA are used. Thus when the 12 period EMA crosses the 26 period EMA from above, only then the MACD line crosses zero levels from above. Consequently when such a pattern is witnessed from below, that is 12 periods EMA crosses 26 periods EMA from below, then usually the MACD line crosses zero levels from bottom.
The MACD histograms:
MACD histograms in Forex normally represent the difference between the MACD and MACD line. Two most important factors to be analyzed here are the convergence and divergence patterns. Convergence basically depicts a shrinking histogram, whereas divergence shows an expanding or increasing histogram. Generally, when the MACD and MACD lines are getting closer, Forex trader’s witness convergence and expect slowdown in price movements, but in divergence the MACD is seen accelerating with the current market trend. It shows a buy signal when the histogram is seen below the zero line, and start converging to this (0) line. On the other hand, a sell signal in Forex is seen when the histogram is appearing above the zero line, and from there it start converging towards the zero line.
Concept of Divergence in MACD:
This concept explains us two types of situations. The trader through this indicator witnesses a bullish divergence and a bearish divergence. A bearish divergence is seen when the indicator suggests the downward trend in the forex prices, but the current market trend is continuing in the upward direction. On the other hand, in bearish divergence the MACD indicator is suggesting an upward trend in future prices, however the market is continuously falling, against expectations. Thus these divergence patterns can help traders in during decision making for exit ad entry levels and time.
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