Moving Average Convergence/Divergence (MACD) is one of the most popular technical oscillator indicators among forex traders, which follows trends and reflects the relationship between two moving averages of price.
The MACD indicator is the difference between two exponential moving averages (EMA) with periods of 12 and 26. To clearly indicate favorable times for buying or selling, a signal line – a 9-period moving average of the indicator – is also plotted on the MACD chart.
It is a standard indicator in the MetaTrader trading terminal.
Using the MACD Indicator and Its Trading Signals
This indicator is most effective during significant market fluctuations within a trading range. The most commonly used MACD signals are crossovers of its lines, overbought/oversold conditions, and divergences.
The main rule of trading using MACD is based on crossovers of the indicator with its signal line. When the Moving Average Convergence/Divergence falls below the signal line, it is time to open short positions. When it rises above the signal line, it is time to open long positions. A buy or sell signal is also given by crossovers of the MACD line above or below the zero line.
The ability of the MACD indicator to accurately identify overbought/oversold conditions is also highly valued. If the short-term moving average is above the long-term one (MACD is rising), it means that the price may be overvalued and could return to a more realistic level soon.
If a divergence (also known as a divergence) appears between the indicator and the price, it indicates an upcoming trend change. A bullish divergence occurs when the price reaches new highs, but the indicator does not keep up. A bearish divergence occurs when the price reaches new lows, but the MACD does not. These divergences gain particular significance in overbought/oversold zones.
Formula for Calculating the MACD Indicator
MACD is formed by subtracting the 26-period exponential moving average from the 12-period one. After that, a 9-period simple moving average of the indicator is plotted on the chart as a dotted line, which becomes the signal line.
MACD = EMA(CLOSE, 12) – EMA(CLOSE, 26),
SIGNAL = SMA(MACD, 9),
where:
– EMA – Exponential Moving Average;
– SMA – Simple Moving Average;
– SIGNAL – The indicator’s signal line.
FAQ
What is the MACD indicator?
The MACD indicator is a technical analysis tool that shows the relationship between two moving averages of a security’s price.
How is the MACD calculated?
The MACD is calculated by subtracting the 26-period EMA from the 12-period EMA, with a 9-period EMA acting as the signal line.
What do MACD crossovers mean?
MACD crossovers indicate potential changes in trend direction, with the signal line crossing above or below the MACD line signaling buy or sell opportunities.
