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MACD is the simplest and very reliable indicator used by many Forex traders.

MACD (Moving Average Convergence/Divergence) has in its base Moving Averages.

It calculates and displays the difference between the two moving averages at any time. As the market moves, moving averages move with it, widening (diverging) when the market is trending and moving closer (converging) when the market is slowing down and possibility of a trend change arise.

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MACD Quick Summary

Trading with MACD indicator includes the following signals:

MACD lines crossover — a trend is changing
MACD historam staying above zero line — market is bullish, below — bearish.
MACD histogram flipping over zero line — confirmation of a strength of a current trend.
MACD histogram diverges from price on the chart — signal of an upcoming reversal.

Basics behind MACD indicator

Standard indicator settings for MACD (12, 26, 9) are used in many trading systems, and these are the setting that MACD developer Gerald Appel has found to be the most suitable for both faster and slower moving markets. In order to get a more responsive and faster performance from MACD one can can experiment with lowering MACD settings to, for example, MACD (6, 12, 5), MACD (7, 10, 5), MACD (5, 13, 8) etc.
These custom MACD settings will make indicator signal faster, however, the rate of false signals is going to increase.

MACD indicator is based on Moving Averages in their simplest form. MACD measures the difference between faster and slower moving average: 12 EMA and 26 EMA (standard).

MACD line is created when longer Moving Average is subtracted from shorter Moving Average. As a result a momentum oscillator is created that oscillates above and below zero and has no lower or upper limits. MACD also has a Trigger line. Combined in a simple lines crossover strategy, MACD line and trigger line crossover outperforms EMAs crossover.

Besides being early on crossovers MACD also is able to display where the chart EMAs have crossed: when MACD (12, 26, 9) flips over its zero line, if indicates that 12 EMA and 26 EMA on the chart have crossed.

How does MACD indicator work

If to take 26 EMA and imagine that it is a flat line, then the distance between this line and 12 EMA would represent the distance from MACD line to indicator's zero line.
The further MACD line goes from zero line, the wider is the gap between 12EMA and 26 EMA on the chart. The closer MACD moves to zero line, the closer are 12 and 26 EMA.

MACD histogram measures the distance between MACD line and MACD trigger line.

MACD indicator Formula

MACD = EMA(Close)period1 - EMA(Close)period2
Signal Line = EMA(MACD)period3

where
period1 = standard settings are 12 bars
period2 = standard 26 bars
perid3 = standard 9 bars

The following are the steps to calculate MACD

1. Calculate the days EMA of closing price
2. Calculate the days EMA of closing price
3. MACD = days EMA - days EMA
4. Signal Line = 9-days EMA of MACD

Formula for EMA

EMA = (SC X (CP - PE)) + PE

SC = Smoothing Constant (Number of days)
CP = Current Price
PE = Previous EMA

Trading MACD Divergence

MACD indicator is famous for its MACD Divergence trading method.

Divergence is found by comparing price shifts on the chart and MACD values.
MACD Divergence phenomenon occur as a result of shifting forces on the Forex market.
For example, while Sellers may seem to be dominating the market at the moment and price continues to trend down, there already might be signals for an overall weakening of Sellers power. This key warning moments can be observed with MACD indicator. What Forex traders would see is that despite price making new Lower Lows, MACD doesn't confirm that and instead registers a Higher Low, signaling that Sellers are running out of steam and a trend change is on its way.

Opposite will be true for Buyers.

How to trade MACD Divergence

When MACD line (on our screenshot it is a blue line) crosses Signal line (red dotted line) - we have a point (top or bottom) to evaluate. With two most recent MACD line tops or bottoms find corresponding tops/bottoms on the price chart. Connect MACD tops/bottoms and chart tops/bottoms.
Evaluate the lines received, as shown on the larger screenshot (click on the small picture to enlarge).

With MACD divergence spotted Enter the market when MACD line crosses over its zero point.
Another entry strategy is to find 2 most recent swings high or low on the chart and draw a trend line trough them; and then set an Entry order on the breakout of that trend line.

MACD divergence trading method used not only to predict trend turning points, but also for trend confirmation. A current trend has high potentials to continue unchanged in case no divergence between MACD and price was established after most recent tops/bottoms evaluation.

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MACD divergence explained

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The moving average convergence divergence (MACD) is an oscillator that combines two exponential moving averages (EMA)—the period and the period—to indicate the momentum of a bullish or bearish trend. MACD can be used to signal opportunities to enter and exit positions.

It is one of the most popular technical indicators in trading and is appreciated by traders worldwide for its simplicity and flexibility.

Read on to learn about the MACD and some of the MACD strategies used by traders.

MACD: An Overview

The concept behind the MACD is straightforward. It calculates the difference between a security's day and day exponential moving averages (EMA). Each moving average uses the closing price of its period ( and day) to calculate its moving average value.

On the MACD chart, a nine-period EMA of the MACD itself is also plotted. This line is called the signal line. It acts as a trigger for buy and sell decisions when the MACD crosses over it. The MACD is considered the faster line because the points plotted move more than the signal line, which is regarded as the slower line.

MACD Histogram

The MACD histogram is a visual representation of the difference between the MACD and its nine-day EMA—not highs and lows. The histogram is positive when the MACD is above its nine-day EMA and negative when the MACD is below its nine-day EMA. The point on the histogram where momentum is zero is the zero line.

If prices change rapidly, the histogram bars grow longer as the speed of the price movement—its momentum—accelerates and shrinks as price movement decelerates.

Trading Divergence

Divergence refers to a situation where factors move away from or are independent of others. With the MACD, it is a situation where price action and momentum are not acting together.

For instance, divergence can indicate a period where the price makes successively lower highs, but the MACD histogram shows a succession of higher lows. In this case, the highs are moving lower, and price momentum is slowing, foreshadowing a decline that eventually follows.

By averaging up their short, the trader eventually earns a handsome profit, as the price makes a sustained reversal after the final point of divergence.

Types of MACD Strategies

Histogram

The MACD histogram can be a useful tool for some traders. While we've explained a little bit above about how to read it, here's how it works. It plots out the difference between the fast MACD line and the signal line. Traders can use the MACD histogram as a momentum indicator to jump ahead of changes in market sentiment.

There are three different elements involved with the histogram, which is mapped out around a baseline:

• The MACD line (produced by subtracting a long-term EMA from a shorter-term EMA)
• The signal line (produced by subtracting the two EMAs and creating a nine-day moving average)
• The histogram (produced by subtracting the MACD line from the signal line)

Keep in mind, though, that the MACD histogram has its faults (see the "Drawbacks" section below). Many traders often use other tools and techniques to determine and make their moves based on market sentiment, such as the trading volume of a given security.

Crossover Strategy

A crossover occurs when the signal and MACD line cross each other. The MACD generates a bullish signal when it moves above its own nine-day EMA and triggers a sell signal (bearish) when it moves below its nine-day EMA.

Zero-Cross Strategy

When the MACD crosses from below to above the zero line, it is considered a bullish signal. Traders generally take long positions when this occurs. If it crosses from above to below the zero line, it is considered a bearish signal by traders. Traders then enter short positions to take advantage of falling prices and increasing downward momentum.

In both cases, the longer the histogram bars, the stronger the signal. When there is a strong signal, it is more likely—but not guaranteed—that the price will continue in the trending direction.

Money Flow Index

The money flow index allows traders to use price and trading volume to identify and determine when assets are overbought or oversold in the market. This oscillator moves between 0 and where readings below 20 are oversold and 80 are considered overbought.

One of the drawbacks of this strategy, though, is that it tends to produce fewer signals. That's because the readings it produces are extreme due to the fact that they are focused on spurts in volume and prices.

Relative Vigor Index (RVI)

The relative vigor index (RVI) is a commonly used momentum indicator in technical analysis. It measures how strong a trend is by comparing the trading range of a certain security with its closing price. The comparison is made by using a simple moving average (SMA) to smooth the results out.

Traders generally believe that the value of the RVI increases as a bullish trend continues to gain momentum. That's because, in this case, an asset's closing price tends to fall at the higher end of the range. The opening price, on the other hand, stays further down on the lower end of the range.

MACD With RSI and SMA

Traders may often use the MACD and relative strength index (RSI) indicator strategy. This allows them to use both the RSI and the SMA to their advantage. But what are they?

• The RSI allows traders to measure how strong a trend is while being able to pinpoint different points of reversal along that trendline. This is mapped along a baseline of 14 periods over two different levels: an oversold and an overbought one. Where the levels are set depends entirely on the trader and their strategies. Some may choose conservative levels of 20 and
• The SMA calculates the average range of prices by the number of periods in that range, usually with closing prices. This indicator allows traders to assess whether they believe a trend will continue or reverse.

Combining these three strategies together allows traders to:

• Project future price changes using the RSI
• See how strong a trend is and where it's headed using the MACD
• Use the SMA as a lagging trend-following indicator

Drawbacks of MACD

Like any oscillator or indicator, the MACD has drawbacks and risks.

• One of the most significant risks is that a reversal signal can be a false indicator. For instance, the zero-cross image above has a point where the MACD crosses from below and back again in one trading session. If a trader entered a long position when the MACD crossed from below, they would be left with a losing stock if prices continued to fall.
• MACD does not function well in sideways markets. If prices generally move to the side when they stay within a range between support and resistance. MACD tends to drift toward the zero line because there is no up or down trend—where the moving average works best.
• Additionally, the MACD zero-cross is a lagging indicator because the price is generally above the previous low before the MACD crosses the line from below. This can cause you to enter a long position later than you might have been able to.

Example of a MACD Trading Strategy

We'll use our zero-cross image for a MACD trading example. As trading proceeds, you observe the MACD initially crossed the zero line from below, then crossed again from above. A trader might notice the histogram bars moving down with the MACD, indicating a possible reversal and opportunity for a short trade.

When the line crossed from above, the trader could take a short position and net a profit when the prices began to climb again.

The zero-cross strategy could be used again to take a long position when the MACD crosses the zero line from below. At the point circled in our image, prices have been rising and momentum is up. The trader could take a long position at this point.

The Bottom Line

MACD is one of the most-used oscillators because it has been proven to be a reliable method for identifying trend reversals and momentum. There are various strategies for trading MACD, including those described above. Try each out to find the one that works best for you and your trading plan.

This article will explain how to use the MACD indicator so you will learn how to:

• Identify momentum reversals.
• Predict turning points.
• Get higher win rates and better trades as a result.

MACD (or Moving Average Convergence Divergence) – pronounced “mac-dee” – tracks price momentum strength. Because of its popularity, it is a standard technical indicator included in every trading platform.

You very probably won’t ever need to calculate the MACD indicator manually, but you will get a better understanding of the indicator if you know how its output is derived.

There are three parts to the MACD indicator:

Part1: MACD Line

The MACD line is the difference between two exponential moving averages (EMAs), one known as a fast EMA and the other a slow EMA. The one with the lower look-back period is the fast EMA.

Part 2: Signal Line

The signal line is a moving average of the MACD line, giving the effect of smoothing out the MACD Line. The most common signal line setting is a 9-period moving average (SMA or EMA are both common types of moving average which are used for this).

Part 3: MACD histogram

The MACD histogram (displayed as bars) is the MACD line minus the signal line.

Depending on your MACD strategy, you may only need to display the histogram as the rest of the indicator might not be useful to you. The indicator settings on your platform will let you keep the histogram and remove the other lines if you want.

The most common MACD indicator settings are 12, 26, and 9, which means:

MACD Line: EMA and EMA.

Signal Line: 9-period moving average (SMA or EMA). Interestingly, MetaTrader 4 and 5 requires that the signal line is set as a simple moving average, while many other platforms let it be either an SMA or EMA.

While these are the most popular settings, you can adjust them to your liking on your trading platform.

The MACD histogram bars become longer as the gap widens between the MACD line and the signal line:

Longer histogram bars = greater price momentum.

Shorter histogram bars = weaker momentum.

This concept is key to how the MACD indicator tracks and displays momentum. I will build on this as I look at two common MACD strategies: momentum reversal and trend entry, which can help you get started using MACD in Forex and other markets.

There are three steps to trading momentum reversals using the MACD indicator.

Step 1: Price moves into support or resistance

First, you want the price to move into a market structure, especially a previous support or resistance level. Never blindly use indicators—MACD works best when you combine it with price action context.

Step 2: MACD histogram matches the price direction

• If the price moves up to resistance, the MACD histogram should be above the zero line, i.e., showing bullish momentum.
• If the price moves down into a support area, the MACD histogram should be below the zero line, i.e., showing bearish momentum.

Ideally, you want to see large MACD bars with the price moving swiftly to previous support or resistance. That may seem counterintuitive as you are about to trade against that move. However, swift moves can snap back and reverse quickly, putting you in profit faster, so the strategy seeks such moves as reversal entry points.

Step 3: Price rejection

Before entering a trade, the price must reject the support or resistance level. This could be a simple bounce or a reversal pattern. I particularly like two reversal patterns: one I call the “smart engulfing reversal,” and the other is the pin bar.

Smart engulfing reversal:

The pattern is a candle with a long body and short wicks followed by a candle in the opposite direction, again with a long body and short wicks.

• Each candle's real body should be at least two-thirds of the entire candle’s full length.
• The second candle’s body must cover most of the price range of the first candle’s body.

Pin Bar:

A pin bar or candlestick has a real body confined to the bottom or top third of the candle length. The direction of the long wick determines whether the candle is bearish or bullish (regardless of whether the candlestick body is bullish or bearish).

Trade examples:

1. The price makes a pin bar resistance with bullish MACD momentum at a previous support level. It is common for a previous resistance level to turn into support, and vice versa—this is known as “role reversal”. In this case, the role reversal gives you a short trade entry opportunity.
2. A “smart engulfing reversal” pattern then appears at the same level, and again there is bullish MACD momentum. Now you have a second short trade entry opportunity.

Notice that the second short entry has stronger bullish MACD bars, yet the price falls further than the first entry. It demonstrates you can trade against strong price momentum if you have the correct price action context to do so.

Here is another example set-up in the EUR/USD currency pair:

Interestingly, in this example, when the price forms resistance after breaking support, the price action is subtle, but the MACD bars appear very bullish. This is a clue to help you enter short. In case you missed it, a bearish smart engulfing pattern appeared at the level with bullish MACD bars to give you another short entry opportunity.

Step 1: Identify the trend

Make sure you are looking at a trend correctly:

• An uptrend has a series of higher lows.
• A downtrend has a series of lower highs.

Step 2: Identify a pull back

The best place to enter a trend is when the price pulls back against it.

When you enter a trend on a pullback, you want to see the MACD histogram register in the direction of the pullback.

• To enter an uptrend, wait for the price to pull back down and for the MACD histogram to be below the zero line.
• To enter a downtrend, wait for the price to pull back up and for the MACD histogram to be above the zero line.

How to avoid a bad entry:

Sometimes traders will enter as the price is moving quickly in the direction of a trend, afraid they will otherwise miss the move. This “FOMO” (fear of missing out) driven trading is dangerous for two reasons: you will often need a larger stop loss, and you could be entering before a pullback that quickly has you sitting in a losing position.

To avoid these problems, do not enter a trend when the MACD is over-extended in the direction of the trend. Instead, wait for the price to pull back. The extra wait will often let you enter at a better price.

Another popular strategy is to enter when the MACD line crosses the signal line—many traders consider this to be the “classic” MACD strategy.

• When the MACD line crosses the signal line from below to above, the signal is bullish.
• When the MACD line the signal line from above to below, the signal is bearish.

The further away the crossing point is from the zero line, the stronger the signal. It is important not to trade this signal blindly. Only use this signal with price action confirming. For example, when you see confluent support or resistance that should help the trade, or if the setup is pointing in the same direction as the prevailing trend.

I find there are two considerable limitations with MACD:

1. MACD is a lagging indicator. It is derived from moving averages which themselves lag price. Although MACD is more sophisticated than moving averages by themselves, it can still lag. That is why combining MACD with price action is essential to prevent multiple false readings.
2. Filtering with MACD means you will miss some good trades. That is always a risk when using any indicator. For example, the price may not pull back very far in a strong trend and therefore not register on the MACD indicator as a pullback.
3. MACD works best in trending markets. When markets are stuck in a range rather than a likely pause in a trend, MACD strategies often generate many poor-quality signals. Therefore, it is so important to be aware of the long-term price action in whatever you are applying the MACD indicator to.

The MACD indicator is a powerful momentum detector. You can use it to find trade entries and even exits if you find the momentum is turning against you. However, like any technical indicator, the MACD has limitations and can give unreliable signals if used in the wrong context. To use the indicator most effectively for successful high-probability trading, it is important to:

• Pay attention to the long-term trend, or lack of one.
• Trade only in the direction of the long-term trend if there is one.
• If there is no trend, only look for long trade entries near likely key support areas, and short trades near likely key resistance areas.
• Remember that the presence of abnormally large, expanding bars in the MACD histogram is probably the most reliable entry signal which can be given by the indicator, ideally followed by a pullback which quickly fails.
• Only take an MACD signal if the naked price chart supports it (the candlesticks or price bars should look attractive and telegraph momentum on their own).

Is the MACD a good indicator?

MACD is one of the best tools to track momentum, and it is especially powerful when you combine it with price action, support & resistance, and trend analysis.

What is a good MACD value?

The most popular MACD values are 12 (fast EMA), 26 (slow EMA), and 9 (signal line). Trading platforms usually have this as the default setting. The signal line can be either an SMA or EMA.

When should you buy with the MACD?

You can buy or enter a trade when the MACD indicator shows momentum in the direction you need.

Is the MACD good for swing trading?

MACD is more popular with short-term traders but is equally valid on swing trades using higher timeframes, e.g., 4-hour.

How do you use the MACD indicator effectively?

Use the MACD indicator in conjunction with price action to measure momentum and find trade entries. The relative length of the MACD Histogram is an excellent way to read momentum.

What is the red line in MACD?

In MetaTrader MT4, the red line shown by the MACD indicator is usually the signal line.

What is the MACD used for in Forex?

The MACD indicator in Forex tells you when a currency pair has strong or weak momentum and can help enable you to find trade entries and exit points.

How do you read an MACD indicator in Forex?

When the MACD histogram bars grow longer, this tells you the price has increasing momentum. When the bars are getting shorter, there is shrinking price momentum. Another way to read the MACD Indicator is when the MACD line crosses the signal line from above to below, it is a bearish signal, and vice versa for a bullish signal.

The MACD (typically read as &#;mac D&#;) is one of the most popular indicators among forex traders. It&#;s a very useful tool in your trading arsenal. And it&#;s helpful even if you aren&#;t using it as your main signal generator!

One of the reasons it&#;s so popular is that it&#;s a very versatile trading indicator, despite being relatively simple in construction. This allows it to have multiple and varied applications which help forex traders develop their own style when using it.

Because of its versatility, you could probably write a whole book on how to squeeze the last drops of utility out of it. So, let&#;s focus on the basics to get a good understanding of how the MACD&#;s gears synch. And, from there, you can customize it to your preference.

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The Converging Divergence

The MACD combines one of the most effective and popular forex trading styles; divergence, with crossovers. This allows it to generate a wealth of signals to suit most FX trading styles. It even allows it to &#;check&#; itself in providing parallel analysis points.

The name comes from Moving Average Convergence Divergence. It works based on two exponential moving averages, a fast and a slower one. The difference between those is then represented in the &#;histogram&#; (the solid bars). The slower EMA is graphed on top of the histogram, providing the signals (and thus is often called the &#;signal line&#;).

The Theory

By playing two exponential moving averages off each other, the MACD is looking to identify a forex market trend, and then find when it&#;s becoming exhausted. This allows for the &#;crossover&#; function of the signals. By definition, before the market can go in a new direction, it has to cross over the prior trend.

The MACD offers a level of sophistication to this basic principle by plotting the difference between the slow and fast EMA, showing the momentum of the market. Signals are produced when the momentum crosses through the trendline, not just when the EMA does. You see this on the chart when the trend in histogram bars cross underneath the signal line.

The Practice

Because the idea is to catch changes in trend, generally you&#;d say a signal was produced when the histogram crosses the signal line in the direction towards the centerline (0 on the chart). Why? Well, because the histogram measures the difference between the long and short term trend. If the long trend is changing direction, then the difference between it and the short term trend will shrink until they are running parallel. Then the trend changes.

This means that the bigger the histogram bars, the further the short term trend has drifted from the long term one. And the more likely the market is to reverse to the mean. This is why it&#;s popular among swing forex traders, as well. The deviation of the histogram from the signal line can show the market becoming oversold or overbought.

Divergences

By generating a histogram, the MACD can also be used quite effectively to show market divergences as well. This happens as the market trends in one direction, but the histogram moves in the other. At the end of the divergence, you could expect to have a market reversal, the favorite position for most forex traders.

Why this happens is that the longer a trend exists, the more likely it is to get exhausted. This presents as smaller movements in the short term trend, and that allows the long term trend to catch up. The histogram bars become shorter, indicating market exhaustion. Eventually, the counter move will push the histogram to cross the signal line, offering a potential opportunity to enter the market.

The Caveats

No indicator is perfect and complete. While the MACD is very useful and versatile, it&#;s always better to trade an indicator in conjunction with another to verify signals. And always keep an eye on the price action to set your safeties properly.

Hopefully, now that you know why the signals are produced by the MACD, you can have a better understanding of strategy development using this neat indicator.

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