Moving Average Convergence/Divergence (MACD)
What is it?
The MACD is one of the most popular oscillator used by currency traders. This is a momentum indicator can be used to confirm trends, while also indicating reversals, or overbought/oversold conditions. The MACD is calculated by taking the difference between the 2 exponential moving averages. The two that is usually used are the 26-day and 12-day moving averages.
How can MACD be used for trading?
Crossovers
The most common way to use the MACD is to buy/sell a currency pair when it crosses the signal line or zero. A sell signal occurs when the MACD falls below the signal line, while a buy signal occurs when the MACD rallies above the signal line.
Overbought/Oversold
The MACD can also be used as an overbought/oversold indicator. When the shorter moving average moves away significantly from the longer moving average (i.e., the MACD rises), it is likely that the currency price’s movements are starting to exhaust and will soon return to more realistic levels.
Divergences
When the MACD diverges from the trend of the currency price, this may signal a trend reversal. In addition, if the MACD makes a new low while the currency pair does not also make a new low, this is a bearish divergence, indicating a possible oversold condition. Alternatively, if the MACD is making new highs while the currency pair fails to confirm these highs, this is a bullish divergence, indicating a possible overbought condition.
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