Trading Forex in MACD: Moving Average Convergence/Divergence

MACD uses exponential moving averages (EMA), which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer period of EMA from the shorter period of EMA. Translating the words into mathemathcis, this is how a MACD calculation looks like:

MACD = EMA [shorter period] - EMA[longer period]

The resulting plot forms a line that oscillates above and below zero (positive when EMA[shorter] > EMA[longer] and negative whenver EMA[shorter] <>

Signal = EMA [certain period] of MACD

Generally, a 12 day EMA is often userd as the EMA[shorter period]; 26 day EMA for the EMA[longer period]; and 9 day EMA of MACD is used as the signal line. These are the standard figures used by the creator of MACD, Gerald Appel, when the technical indicator first used in 1979. Another popular calculation periods in modern days is 7, 13, 5; where EMA[7] is used for the short period, EMA[13] is used for the long period, and 5 days for EMA of MACD (the signal line).

Again, translating words to maths presentation, this is how a standard MACD calculations looks like:

• MACD = EMA [12] - EMA[26]
• Signal = EMA [9] of MACD

Example of MACD graph (source from Investopedia.com Trading the MACD divergence )

Green line = MACD Black line = Signal Purple blocks = MACD - Signal

MACD Indications

Here's how traders take MACD as trading indicators. From the maths of MACD,

• MACD = EMA [12] - EMA[26]
• Signal = EMA [9] of MACD

A bullish signal (buy in signal) is triggered whenever

• A positive MACD (12-day EMA is trading above the 26-day EMA, EMA[12] > EMA[26])
• Moving average positive crossover (MACD is trading above the EMA[9] of MACD)
• Center line positive crossover (MACD=0 and MACD is trading above the EMA[9] of MACD)

A bearish signal (sell off signal) is triggered whenever

• A negative MACD (12-day EMA is trading below the 26-day EMA, EMA[12] <>
• Moving average negative crossover (MACD is trading below the EMA[9] of MACD)
• Center line negative crossover (MACD=0 and MACD is trading below the EMA[9] of MACD)

MACD is more than just about market momentum, it also gives the signal in the trend indication.

If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA will be widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing and this would be considered bullish. If MACD is negative and declining further, then the negative gap between the faster moving average and the slower moving average will be expanding. Downward momentum is accelerating and this would be considered bearish.

Often in reality, the Forex exchange price may drop to new selloff low but the MACD does not hit the new low, this maybe the sign of end of bearish. Or vise versa, the Forex exchange price may hit new high but the MACD might not be hitting on the new high point, this often indicates the change of trend from bullish to bearish.

Usage of MACD divergence in Forex trading

The major usage (or benefit) of trading with MACD divergence is that the MACD chart has the ability to overshadow on trend change, which in turn trigger the sell off or buy in signal. Simply said, negative divergence indicates a change of bullish trend to bearish, while a positive divergence indicates a change of bearish trend to bullish. As MACD trading is taking a relative simple approach on the market, MACD is often used along with other technical analysis (stochastic oscillator for example). Oleh:golearnforex