The MACD is one of the most used Forex indicators for technical analysis. The indicator consists of two lines on an area and a histogram.
Above you see a zoom-in image of the MACD Forex indicator that shows the way it will look like at the bottom of your chart.
The MACD indicator trading strategy involves making trading decisions based on signals that come from the indicator. The indicator is helpful in recognizing potential price increases and decreases. Traders use the MACD indicator Forex tool to support their Forex strategy and to open trades based on signals.
What is the MACD Definition
MACD is an abbreviation of Moving Average Convergence Divergence. The indicator was developed in 1970 by Gerald Appel to signalize changes in the direction, momentum and the strength of the Forex trends. MACD is a lagging indicator, which means that its signals appear after the event has begun on the chart. In this relation, the tool has trend-confirming character.
Default MACD Indicator Settings for Day Trading
The default MACD settings suggest the usage of two lines and a histogram placed on an area. We will go through each of these elements explaining the Moving Average Convergence Divergence formula. But let’s first have a quick look at the three components of the instrument:
The blue line is called an MACD Line. The red line is the Signal Line. And the bars in the middle of the indicator represent a histogram.
MACD Line Calculation
The most important component of the indicator is the MACD line. This is the faster line of the indicator. The calculation of this line involves two Exponential Moving Averages – a 12-period EMA and a 26-period EMA. The MACD line represents the difference between the two EMAs:
MACD line = 12 EMA – 26 EMA
MACD Signal Line Calculation
The slower line of the MACD indicator calculation is called a signal line. It involves the usage of another Exponential Moving Average. The truth is that the MACD signal line is a 9-period EMA of the MACD line.
Signal Line = 9-period EMA of MACD line
MACD Histogram Explained
MACD histogram calculation is a visualized difference between the two lines of the indicator. This means that you need to subtract the two lines to get the value of the MACD histogram.
MACD Histogram = MACD Line – Signal Line
How to Read MACD Indicator
Now let’s discuss the general MACD indicator how-to-use guide. The tool involves three major signal groups, and we will now go through each one of them.
The MACD crossover is the most popular signal related to the indicator. It involves the intersection of the two lines. In this relation, we recognize two types of MACD crossover:
Bullish MACD Crossover – It comes when the MACD line crosses the Signal Line in the bullish direction. This signal alerts that the price of the Forex pair is likely to increase.
Bearish MACD Crossover – It comes when the MACD line crosses the Signal Line in a bearish direction. The bearish MACD cross indicates that the price of the Forex pair is likely to decrease.
The MACD analysis involves the recognition of divergence as well. In this relation, there are two types of MACD divergence in Forex – bullish and bearish divergence.
Bullish MACD Divergence – When the bottoms of the price action are decreasing, but the bottoms of the MACD are increasing, we have a bullish divergence. It signalizes that the Forex pair is about to do a bullish run.
Bearish MACD Divergence – When the tops of the price action are increasing, while the tops of the MACD are decreasing, we have a bearish divergence. It indicates that the price might drop on the chart.
Now I will show you an example of a trade I did with the MACD indicator. The video below shows a bullish MACD divergence that I used to open a long trade with the USD/CAD Forex pair. Also, the video shows how to successfully combine the Forex MACD with price action rules. The video includes signals from a Falling Wedge chart pattern.