MACD - What is MACD Indicator
The MACD is an abbreviation of the term Moving Average Convergence Divergence. It is usually a trend–capturing and a trend-following momentum indicator used to show the relationship between the two moving prices averages.
To use the MACD indicator, you do not have to download it separately, but you need to download any Meta Trader 4 platform. The MACD indicator is usually built-in every Meta trader 4 or 5. If you have the best MACD day settings, you can make significant changes in your various days' trading strategies.
This article discusses the MACD indicator in detail and calculates the MACD, it's limitation, divergence and how it works.
One of the most popular momentum oscillator used by the Forex Traders is the MACD (Moving Average Convergence/Divergence) indicator. Even though MACD is just an oscillator, it is used to determine the oversold and the undersold conditions.
The MACD can be described to appear on the chart as just two lines oscillating, and they do not have the boundaries. These two lines crossover provide the trading signals with just two similar to an average moving system.
How Does the MACD Indicator Works
By just looking at the charts, you may fail to understand how the MACD indicator functions especially if you are on your entry-level or newbie in Forex trading hence you might end up looking for an expert to help. However, it is very easy to understand how it functions; therefore, everybody can understand the science behind the two curves.
On the instance that the MACD is crossing below zero, it is considered to be bearish, and when it is considered to be above the zero, it is considered to be bullish. Also when the MACD is below the zero, it is said to be bearish, and if it turns above the zero, it is said to be bullish.
If the MACD line crosses on top of the signal line from below, the MACD indicator becomes bullish. If it goes farther down the zero lines, it becomes a firm line. If the indicator line crosses above zero, it is viewed as the bearish and the further it goes above the zero lines, and it is considered a stronger signal.
It is always advisable to avoid trading during the trading ranges because of the MACD indicator whipsaws with a fast line crossing up and down the signal line. If you use it at this time, you might end up achieving the unwanted results.
Interpreting the MACD on a Trading Chart
Interpreting the MACD on a trading chart can be challenging, especially if you are a beginner in the Forex trading career. You require trading experience or knowledge on how to read and interpret the MACD on the chart.
The MACD is applied while measuring the strength or momentum of the trend using the MACD line, and the Zero line is used as the reference point.
⦁ If the MCD indicator line goes above the zero lines, the trade signal is referred to as uptrend.
⦁ If the MACD indicator line crosses below the zero lines, the signals are then referred to as the Downtrend.
Also, the MACD signals are used to sell or buy the orders by the trader.
The MACD was designed to use the exponential moving the averages of 12 and 2 days, even if the MACD is model into which it can be inserted into a moving average that suits the back tests and fancy on the security.
The full MACD indicator comprises a line indicator and a trigger. A trigger refers to a moving average of the superimposed on the top of the indicator. In the MACD, the arrow shows where you should sell and buy.
How to Calculate the MACD
It is possible to calculate the MACD if you are given the 26-period value of EMA (Exponential Moving Average) and the 12 periods EMA. The MACD is derived by just subtracting the 26 period EMA from the 12 periods EMA.
The shorter EMA usually diverges away and converges towards the longer EMA, and this causes the MACD to oscillate around the zero levels, and the signal line can be created within a 9-period EMA of the MACD line.
The Divergence of MACD
In the Forex Trade, it is essential to understand the importance of the convergence and divergence of the MACD. Every time the MACD is making a higher low, the price always makes a lower low, and this entire scenario can be considered the bullish divergence.
On the occasion that the MACD makes a higher high, it is now referred to as the bearish divergence. This divergence will always appear right after the movement of the sharp price either lower or higher. The divergence is just a cue where her prices can reverse, and the break of the trend line usually confirms it.
It is always essential to understand the divergence of the MACD because it will help you come out with a trading strategy. This can be done with the best MACD indicator of the day.
The Limitations of MACD
No matter how well the MCD indicator works in the markets which are trending, it is also associated with various limitations. If you are not a beginner or a newbie forex trader, you may have realized that MACD indicators are preferred in the trending markets.
Its best performance only in the trending markets has limited its use on the other markets by the traders who depend on it for their trading strategies. If you use MACD indicators in the range-bound markets, it is likely to provide flawed signals.
You will need to learn the basics of the MACD indicators and learn when you should employ it as the indicator to achieve the optimal use. This indicator is somehow difficult to be used by the inexperienced traders, and this is the main reason why going through the basic moving average and the EMA fundamentals will help the Forex traders who are interested in using the MACD indicators.
The MACD indicators are very personal to the trader because it has very many variations that can be implemented. It is also not consistent because its results vary from one Forex trader to another due to its subjective nature. To achieve better results, the Forex traders need to follow various fundamental outlines when you are using the MACD.
They include the EMA parameters selection and the best time frame as the MACD usually functions differently in different time frames.
The traders can be able to practice and become experts by just using the risk-free demo trading accounts. Using these accounts, the traders can be able to avoid their risk in the capital, and they can be able to choose when they would like to enter into the live markets.
There is usually a different setting in a Day trading that comprises the best day trading MACD settings. In this specific scalping system, you can be able to use the MACD on the various setting. The main objective of using this approach is to be able to capture the longer time frame for every 5m scalps.
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