Currency Charts: Using The MACD Indicator

Moving Average Convergence Divergence indicator or MACD for short is by far the most desired FX chart tools. In some situations this tool is operated as a unique signal to trade and in others, it works merely as an indicator in itself, or as a check to reinforce other chart tools.

As its title suggests, the MACD traces the moving average, both fast and slow and it unveils whether they are diverging (moving away from each other) or converging (moving toward each other).

When they are converging you will see the two lines on the chart advancing towards each other and the bars on the histogram at the bottom of the chart get shorter. This means that the present movement is either terminating

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The faster line by default has a speedy reaction to price movements relative to the slower line. Thus during the beginning of a new trend, the faster line will reach and finally intersect the slower line. Typically, a detachment or divergence from the slower line means the start of a new trend.

Upon their intersecting, bars on the histogram are on zero after which they reverse their axis advancing below if they were atop, and above if they were below. If a stable new trend is coming up, the bars will quickly extend in the new direction.

This intersection then can be utilized as an alert to begin a trade. A fast line crossing the slow line from beneath is a buy sign whilst a fast line crossing from top, is a sell notification.

But all is not well with the MACD, with some problems rendering it insufficient to be the sole trading tool. This is due to the fact that the fast line lags behind the true prices literally because it is an average of part prices. Thus trends could be culminating in a volatile market change before seeing the beginning echo on the MACD intersection.

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Basically the MACD is a better indicator of the stability of a trend than it is of its direction. Thus a number of traders would be indifferent to the crossover and concern themselves with rating the length of the bars. Anyhow it is not a good idea to get in a trade on the basis of this histogram (measuring divergence) and then exit it as soon as the price goes against you.

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In summary, other indicators on FX charts are usually better determinants of buy or sell decisions for amateur traders, reserving the MACD for general market analysis.

Disclaimer: Currency investing can be dangerous, can end up in considerable losses, and is not right for every person.