FX Charts: Adopting The MACD Indicator

One of the favored indexes on FX charts is the Moving Average Convergence Divergence indicator or MACD for short. In some situations this tool is operated as a solitary signal to trade and in others, it plays merely as an indicator in itself, or as a check to reinforce other chart tools.

What the chart depicts are the slower and faster moving averages and their corresponding distance, whether they are moving away (diverging) or coming together (converging).

Two lines moving towards each other as well as waning bars on the bottom histogram implies converging. or has ceased.

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Of course the faster line responds to a change in price movements more quickly than the slower line. So when a new trend starts, the faster line will get closer and eventually cross the slower line. Whenever the fast line diverges from the slower line, it would attest that there is a new trend.

Upon their intersecting, bars on the histogram are on zero after which they reverse their axis traversing below if they were on top, and above if they were below. If a stable new trend is starting, the bars will quickly lengthen in the new direction.

This intersection then can be operated as an alert to commence a trade. You have a buy signal when the faster line crosses the slower line from below, and a sell signal when it crosses from above.

That said, there are some considerations that may render the MACD and the crossover defective as a stand alone alert. The main problem is that even the so-called fast line is significantly, behind actual prices as it calculates averages of the past prices. As a result, in a market characterized by unpredictability, the MACD could be just pinpointing the beginning of a trend that has already ended in truth.

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In general, the MACD is preferred as trend strength indicator contrary to a direction indicator. As a result of this, the bar lengths on the histogram become the object of concern of several traders, and just discounting the crossover. However it is not a good idea to enter a trade on the basis of this histogram (measuring divergence) and then quit it as soon as the price goes against you.

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If you are just starting out in Forex trading, you are probably better advised to prop your trading decisions on other indicators on FX charts and refer to the MACD only for guidance.

Notice: Forex trading can be dangerous, may result in substantial losses, and is not suitable for everyone.

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