Created by the leading investment manager, successful trader and author of numerous publications, Gerald Appel, the MACD indicator, based on the Moving Average Convergence / Divergence, is perhaps the most unique tool included in almost any Forex trading platform. MACD indicators can be simultaneously attributed to both trend indicators and oscillators. MACD's uniqueness lies in the fact that it is able to generate trading signals both in trending market segments and in lateral movement (flat). In addition, the use of this indicator allows you to determine the potential strength of the movement, as well as (with a certain probability) a possible change in the direction of the market.
MACD indicator: description
To plot MACD charts, two methods are used - linear and in the form of a histogram.
Linear MACD is built on the basis of three moving averages, of which only two are plotted. The MACD indicator itself is the difference between two exponential moving averages (EMA with a longer period is subtracted from EMA with a shorter period). In order to get rid of random fluctuations, the so-called signal line is used, which is a simple moving average (SMA). Moreover, for its construction, price values are not used, but the difference between these two moving averages, only with a shorter period. The default values for EMA are 12 and 26, and for SMA 9.
The setting values can be changed. At the same time, an increase in the values (for example, 21.50 and 12) prevents the receipt of false signals, however, it does not allow timely determination of the beginning of the market movement. Decreasing the settings (for example, 6, 13 and 5) makes the MACD indicator more sensitive to price changes, but leads to more frequent false positives.
To make it easier to recognize the change in the distance between the lines, a histogram is used, which is the difference between the fast (MACD) and slow (signal) lines. When the fast line is above the slow one, the bars of the histogram are above the zero line, and vice versa.
It should be noted that in the MT4 trading platform (MetaTrader-4), in contrast to the same Rumus, only a signal line and a histogram are displayed, the MACD indicator itself is not displayed directly.
MACD Indicator Signals
If the MACD line crosses the signal line from top to bottom, this is a clear sell signal. Moreover, the location of the histogram bars below the zero line only strengthens this signal. The MACD line crossing the signal line in the direction from the bottom up, on the contrary, is a buy signal, and the histogram in the position above the zero line is also a strong signal to open a long position.
The occurrence of a contradiction between the indicator reading and the price chart indicates divergence (“bearish” - if the higher maximum of the price does not find its confirmation with the MACD maximum - or “bullish” when the lower minimum is not confirmed) and is a sign of a possible change in trend.
Disadvantages of the MACD indicator
- Both the linear indicator and the histogram very often give false signals, especially on hourly charts and less. Therefore, they are best used on daily timeframes and higher.
- In the formation of trend signals, the linear indicator is triggered with a significant delay.
- Since the MACD indicator calculates the difference between two moving averages, this value is absolute, not relative. Therefore, it is difficult to compare MACD levels over relatively long periods of time, especially for those instruments that have changed exponentially.
- Using MACD, it is difficult to determine overbought and oversold levels.
Nevertheless, the MACD indicator is recognized as one of the most reliable technical indicators in the foreign exchange market. Its signals are simple enough to understand and allow you to correctly assess the current situation and timely conclude a profitable deal even for beginners.