Forex trading involves predicting the future direction of the market. Thus, the skill to spot trends is undoubtedly integral to your investment strategy.
How do you spot one?
You can use the Moving Averages Convergence/Divergence (MACD) to identify trends and their momentum.
By trading with the Moving Averages Convergence/Divergence, you plot the two price range averages and then analyze the convergence and divergence.
When these two lines cross over, it indicates either a buying or selling signal.
In this lesson, you’ll learn the basics of Moving Averages Convergence/Divergence, the three indicators to look out for, and the best practices to effectively confirm a trend using the MACD.
The Moving Averages (MA) indicator is one of the widely used technical indicators in online trading – whether that be for trading forex, stocks, or cryptocurrencies.
But why do traders use the indicators when trading?
It’s because the trading data is immensely saturated. It’s overwhelming to the point that you’re asking for an intense headache if you analyze the price chart without indicators.
With an MA indicator, you smoothen the price data by creating a constantly updated average price. Meaning, there are two lines in your chart that are constantly updated, which make them move.
That’s where the Moving Averages (MA) name came from.
There are three types of moving averages in technical analysis:
Moving Averages Convergence/Divergence is a technical indicator that helps you gauge whether the price is gaining strength, weakening, or about to change direction.
It’s like a road sign that tells you to go straight, slow down, or make a turn.
With a road sign (MACD indicator), you’re less likely to encounter road incidents (losing trade).
The MACD indicator is a trend-following momentum indicator that helps you assess the strength and direction of a market trend.
Unlike other tools that might throw out too many signals, the MACD is usually more accurate. Using it helps you have a profitable insight into the trend.
MACD calculates the difference between two moving averages—typically the 12-period and 26-period exponential moving averages (EMAs).
This difference indicates the momentum behind the current trend, showing whether it’s strengthening or weakening.
The MACD line is the difference between the 12-period EMA (fast) and the 26-period EMA (slow). When the MACD line is above zero, the market is bullish, and when it’s below zero, the market is bearish.
This is a 9-period EMA of the MACD line. The crossover of the MACD line above or below the Signal Line is considered a potential buy or sell signal.
This is the difference between the 12-period EMA (fast) and the 26-period EMA (slow). When the MACD line is above zero, the market is bullish, and when it’s below zero, the market is bearish.
This represents the difference between the MACD line and the Signal Line. It visually indicates the strength of the trend.
If the bars are getting taller, it suggests momentum is increasing; if they’re shrinking, momentum may be fading.
When using MACD to confirm a trend, traders watch for two key signals:
Let’s say you’re eyeing the EUR/USD pair. To make a profitable decision, you’ve decided to analyze the MACD.
Currently, the market is showing these:
How about when the market is about to be bullish?
Well, the price will likely decline when these scenarios happen:
This might be your sign to get out or even short the market if you’re comfortable with it.
Remember, while the MACD is a great tool, it works best when combined with other indicators and a dose of intuition.
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