As a trader, you must become familiar with the Moving Average Convergence Divergence (MACD) indicator. This is one of the most reliable yet the simplest forex indicator.
This is a hybrid tool that is helpful in determining the present market direction as well as measure the price momentum. Many traders use MACD as their sole confirming indicator. This multi faceted indicator acts as a sign of the trend momentum by representing the relationship between the two moving averages.
MACD shows the divergence between two moving averages. The parameter of MACD are expresses as MACD “A, B,C” where A is the number of periods in the fast moving average, B is the number of periods in the slower moving average and C is the periods used to calculate the difference of the two moving averages.
The default settings for MACD are the 12 EMA, 26 EMA and the 9 EMA. MACD is the difference of 26 EMA with the 12 EMA. This line is plotted as the black line. Another line that is usually grey is also plotted alongside this main MACD line and it is the 9 day EMA of MACD.
When these two EMAs come closer together, a crossover can take place. When a crossover takes place, it means the current trend is losing momentum and market might reverse direction. In the same manner, when the two EMAs move further apart, it means the trend is becoming strong.
MACD chart comprises of a histogram in addition to the line chart. The MACD line is colored dark and usually is black while the trigger or the signal line is colored light usually grey. When these two lines come close, it indicates the weakening of the trend and when they move further apart, it means the trend is gaining strength.
When the bars move away from zero, it indicates the momentum is increasing and when the bars move towards zero, it means the momentum is decreasing.