MACD Forex Trading Indicator

One of the most useful indicators in technical analysis is the Moving Average Convergence-Divergence, or MACD.
The MACD is a trend following momentum indicator that shows the relationship between three moving averages of prices. Invented in the 1970's and perfected in the 1980's by Gerald Appel,the MACD is developed as the difference between two exponential moving averages (EMA) having periods of 12 and 26 days. MACD also consists of a third, dotted exponential moving average, called its ‘trigger’ line. The use of moving averages ensures that the indicator will eventually follow the movements of the underlying security. MACD can be used in any timeframe, but the higher the the timeframe the more powerful its effect.


MACD, which stands for ‘Moving Average Convergence Divergence’, is a trend-following, market momentum indicator and oscillator all packaged into one indicator. It is an ideal addition to your forex trading strategies. The most popular formula for the standard MACD is the difference between the currency pairs 26-day and 12-day exponential moving averages. MACD is one of the most effective signals for showing breaks in trends, as well as price momentum. Trading signals are produced when the MACD crosses through its moving average. A positive MACD indicates that the 12-day EMA (exponential moving average) is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-EMA. MACD divergences can also be a key factor in predicting a trend reversal. A popular method of interpretation is that when the MACD is making new highs or lows, and the price is not also making new highs and lows, it signals a possible trend reversal. MACD is the most effective under conditions when the forex trading market swings with high amplitude. It's important to note that MACD, due to its lagging nature, it is least effective when markets are range bound and choppy.

Let's summarize the main features of the MACD indicator. One of the primary forex trading benefits of MACD is that it does incorporate aspects of both momentum and trend in one indicator. MACD is normally found by subtracting the moving average of the past 12 weeks and the moving average of the past 26 weeks. MACD is, basically, a method of comparing moving averages over varying amounts of time. If the MACD is greater than zero, then the market is bullish (The 12-day average is greater than the 26 day-average). If the MACD is less than zero, then the market is bearish. A bearish divergence occurs when the MACD is making new lows while price fails to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Remember, MACD is just one several powerful indicators that the competent forex trader will use in his/her forex trading program.