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What is MACD in Forex?

Many traders use MACD in Forex, Stocks, Options and other markets to identify trends, entry points and exit points.

Moving Average Convergence Divergence, better known by the acronym MACD is a well-known technical analysis indicator used by forex traders of all experience levels. While many traders use MACD in their forex strategies, the indicator is popular with stock traders and even cryptocurrency traders.

As the name suggests, the Moving Average Convergence Divergence indicator incorporates Moving Averages within its formula. More specifically, two Exponential Moving Averages (EMAs). The terms Convergence and Divergence relate to the two Moving Averages coming together and moving away from one another respectively.

The MACD is used as a trend following indicator and a momentum oscillator which makes the MACD in forex a dual purpose indicator. Not only will it help you to confirm trends but also when they will conclude. Dispute MACD being both a trend and Oscillator indicator, you will find this tool in the Oscillator category of your trading platform.

What is an Oscillator

An Oscillator is something that moves back and forth, crossing a central point each time it does. In the context of forex technical analysis indicators, Oscillators are used to signal changes in the momentum of price.

The consensus is that as momentum drops in an uptrend, it highlights that buyers have stopped buying, and vice versa. This family of indicators helps traders to view changes in the strength of a trend and upcoming turning points.

While the MACD is considered a type of Oscillator, the Stochastic Oscillator, Parabolic SAR, and Relative Strength Index are all also found in the Oscillator indicator category.

The Origin of MACD Forex Indicator

Although the MACD indicator is popular with forex traders and comes preinstalled on many trading platforms, the indicator was originally created for trading stocks. In the 1970s a professional money manager, investment advisor and author called Gerald Appel created the indicator.

Besides his expertise in trading and investing, Appel is a qualified psychotherapist which is a skill that provided him with an upper hand as a trader.

How MACD is Calculated

Unlike Moving Averages, the MACD indicator is not overlaid on top of the price chart but shown in a stand-alone panel below the price chart. The indicator is typically composed of three elements which are two lines and one histogram. In some trading platforms, the histogram is negated. See the below image for reference.

**Include a chart of your trading platform or remove that last sentence**

Blue Line: This line is known as the MACD Line. It represents the difference between two Exponential Moving Averages. One of the EMAs being a Short Cycle, typically 12-periods and the other is a Long Cycle, usually being 26-periods. Therefore this line is a 12-period EMA minus a 26-period EMA.

Red Line: This line is known as the MACD Signal Line. It is an EMA of the Blue Line. Typically this EMA is based on 9-periods. This line is often known as the slow line because it’s a moving average of a moving average.

Greed Dashes: This feature is the MACD Histogram. It highlights the difference between the MACD line and the Signal Line. As the Blue Line and Green Line crossover the difference is zero and the Histogram will be tiny if it’s present at all. When the Histogram is below zero, it represents a bearish trend. If it’s higher than zero, it represents a bullish trend. The larger the Histogram, the further away from the Blue Line and Red Line are from each other.

How to Trade with MACD in Forex

The most common way traders use MACD in Forex is by observing the Signal Line crossing over the MACD Line or when the MACD Histogram transitions from being positive to negative and vice versa. A less common application is to look for Divergence.

Signal Line Crossovers

The most common way to interpret signals from the indicator is when the Signal Line meets and crosses the MACD Line. When the Signal Line crosses it signals a change in the trend. When the MACD Line crosses above the Signal Line, it represents a bullish signal. Likewise, when the MACD Line crosses below the Signal Line, this represents a bearish signal.

Another great feature of this indicator is that as the Histogram shifts closer to the Zero line or starts to reverse, you get a fair warning that the lines could meet soon.

Zero Line Crossovers

The Zero Line is sometimes referred to as the Base Line. When the MACD Line crosses from below the Zero line to above, it signals a bullish crossover. Alternatively, when the MACD Line crosses from above the Zero Line to below it, that indicates a bearish crossover.

In general, Zero Line crossovers are considered as a weaker signal than the Signal Line crossover that is described above. A Zero Line crossover can be helpful as a confirmation of the direction of the trend.

Divergence

A more sophisticated way to use the MACD indicator is to look for Divergence. Divergence occurs when the market makes lower lows or higher highs as it trends up or down. However, if the MACD lines aren’t following and fail to also create new lows or highs, then a trend reversal could be expected.

When the price chart and MACD indicator are not in consensus, then there is a strong indication that the trend is exhausting. If there are two failed lows or highs on the candlestick price chart that do not match with the MACD indicator, then the reversal could be quite significant.

False Signals

As is the case with any forex trading indicator, the MACD is not exempt from creating false signals. False signals are likely because the indicators are based not just on moving averages, but moving averages based on moving averages which cause the indicator to lag somewhat.

It’s recommended to complement the MACD with other indicators to help filter out any false signals.

Should you Use MACD in Forex?

Many Forex traders favour the MACD indicator and for a good reason. It works as a nifty two-in-one tool that confirms trends and highlights possible changes.

The MACD is a mainstay in the online trading community and comes equipped with most trading applications, be it on the desktop, web or even mobile device.

Any advice included in this website or correspondence is general advice only and is based solely on consideration of the investment or trading merits of the financial products alone, without taking into account the investment objectives, financial situation or particular needs (i.e. financial circumstances) of any particular person. Before making an investment or trading decision based on the advice, the recipient should carefully consider the appropriateness of the advice in light of their financial circumstances and should carefully review the PDS of the relevant financial product as provided by your investment broker.

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3 Most Used Technical Indicators in Forex

Most Forex Trading platforms are loaded with dozens of indicators. Here are the top 3 most used technical indicators in Forex.

There are hundreds of technical analysis indicators used by forex traders. Every trader will eventually establish their favourites but not before years of painful trial and error. If you’re new to using technical indicators in Forex you probably find it overwhelming to gaze into the screen of your trading platform only to see dozens of indicators staring back at you. Which indicator should you use for technical analysis? This article will give you a leg-up.

Way Too Many Technical Analysis Indicators

In MetaTrader 4, there are 30 technical indicators. In MetaTrader 5, there is 38, and in cTrader, there is 65. Most traders will use more than one indicator in their Forex technical analysis; it’s doubtful there are many who use 30 of them.

Not only are there a lot of indicators, but each indicator also comes with various settings that you can modify. Some platforms let you choose whether the indicator formula uses close prices or you can change it to open, high or low prices. Some platforms also allow you to change the number of periods that prices are derived from.

In this article, we will be introducing you to the three of the most used technical indicators by Forex traders. While there is no official statistic on what the most popular indicators are, we’ve compiled this shortlist based on what traders share in forums, chatrooms and blogs.

Types of Technical Indicators Used Forex

There are four categories of technical indicators, which are Trend, Oscillators, Volatility and Volume.

Trend indicators are used to identify trends in the market.
Oscillator indicators are used to identify overbought and oversold conditions.
Volatility indicators are used to show volatile conditions in the market and highlight when volatility starts and stops.
Volume indicators are used to show how active a market is based on the trading frequency and order volumes of the asset.

Technical analysts usually use an indicator from each of these categories as each piece of information can be helpful towards building a conclusion and making a trading decision. We’ve gone over 3 of the most used technical indicators in forex below.

1. Simple Moving Average

The Simple Moving Average (SMA) is a Trend indicator. Moving averages are used to smooth out the volatility that is shown on a typical chart. When applied on a standard Candlestick chart, you are able to see the highs and lows of each period and the SMA line shows the average price based on previous periods. Usually, this line will slice through the middle of the candlesticks. Traders use Moving Averages to observe trends and get confirmation of other signals they generated from different analytics.

There are several variations of the Moving Average indicator, such as Exponential, Weighted, Triangular, Time Series and Wilder Smoothing. Each of these indicators has a somewhat modified calculation which allows it to show different details.

Traders use Moving Averages for confirming mid-term and long-term trends, identifying support and resistance levels. Moving Averages are very weak when it comes making predictions as they simple consume price data from the past and compare it to current market data.

What makes Moving Averages so widely used, despite the lack of foresight it offers is that many other technical indicators are based on Moving Averages. One such example is Bollinger Bands, which are mentioned below.

2. Bollinger Bands

Bollinger Bands are a Volatility indicator. This indicator is made up of three lines. The middle line is a Simple Moving Average, and the upper band has a standard deviation of 2 added to it, whereas the lower band has a standard deviation of two subtracted from it. As price volatility increases, the bands move further apart. As volatility decreases, the bands move closer together.

The market will roughly trade between the upper and lower bands. Traders use the bands to help them to place support and resistance levels. The higher band is always interpreted as a resistance level and the lower band a support level. The middle band is interchangeably interpreted as either a support or resistance level.

3. Parabolic SAR

Parabolic SAR is another Trend indicator. Parabolic refers to the parabola or curve-like appearance of this indicator. SAR stands for Stop and Reverse.

A downtrend is highlighted by dots above the prices plotted on the chart whereas an uptrend is represented by dots below. Traders look for changes in the positioning of these dots.

When the curve switches from being below the candles to above, it signals that the current uptrend will come to an end. Not only does this indicator signal trend changes, but it helps traders to place their take profit and stop loss levels as well as pending orders to enter the market.

Parabolic SAR is considered by many to be one of the simplest trend indicators to read, which is why we believe it to be widely used by Forex traders. Just like Moving Averages, it does a great job of confirming the presence of a trend. However, Parabolic SAR is also a lagging indicator. It works best only when the currency pair you’re analysing is in a strong trend. If the market is flat, you can’t read much from this technical indicator.

Final Thoughts on Using Technical Indicators in Forex

Some traders like to prove their genius to their peers by sharing complex trade setups with so many lines and objects on their charts that you can barely see the candlesticks. Other traders believe that too many technical indicators in forex can cause decision paralysis.

The truth is, you need to figure out what works for you. Using indicators doesn’t tell you when and where to buy and sell. You still need to test drive them many times and ultimately craft your very own forex trading strategy around the technical indicators that you select.

Any advice included in this website or correspondence is general advice only and is based solely on consideration of the investment or trading merits of the financial products alone, without taking into account the investment objectives, financial situation or particular needs (i.e. financial circumstances) of any particular person. Before making an investment or trading decision based on the advice, the recipient should carefully consider the appropriateness of the advice in light of their financial circumstances and should carefully review the PDS of the relevant financial product as provided by your investment broker.