Moving Average Convergence And Divergence

Moving Average Convergence And Divergence:

The Moving Average Convergence Or Divergence (MACD’s) is a commonly used technical indicator derived from exponential moving averages that can be used in both momentum and range bound markets. Like the RSI it is an oscillator plotted at the bottom of the chart, and it shows the momentum of the market relative to its recent history. MACD’s can be used as an oscillator (indication that the asset will revert back to its mean valuation) OR a momentum indicator (indication that the trend is strong and will continue).

Parameters: The MACD line is the difference between the 12 and 26 day EMA. The signal line is the 9 day EMA of the MACD. Visually, the MACD consists of three elements: The MACD line. This is simply the difference between the 12 and 26 day EMA. It is a line plotted on the chart. The Signal line. The signal line is the 9 day EMA of the MACD line. Like the MACD, it is a line plotted on the bottom of the chart.  The Histogram.

The MACD histogram is simply a bar chart located at the bottom of the chart, where the MACD and signal lines are plotted. The histogram is simply a visual representation of the difference between the MACD and the signal line.  The “zero” point of the histogram — meaning the point where the bars cross above and below — is referred to as the centerline. A Trade Signal is received  when the MACD crosses the signal line, a trade signal is issued. Traders can enter positions following the direction of the MACD.

Overbought/Oversold. No specific numbers indicate whether it is overbought or oversold, but if it is relatively far from its mean compared to its recent history, this may suggest that it is due for a reversion. Divergence occurs when the pair makes new highs/lows but the MACD does not, this suggests divergence, and that the trend may in fact be weakening with a reversal in store.

The MACD crossover is a straight-forward indicator that provides precise timing for entry points. The one drawback of it is that it is sometimes too slow to provide a signal. Sometimes it signals an entry several candles after the ideal entry point. The price has already moved far enough that the trade no longer has a favorable risk: reward ratio. Always consider support/resistance when entering a trade regardless of the crossovers.

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		Kathy Lien is the Chief Currency Strategist at Forex Capital Markets LLC (FXCM).
		Boris Schlossberg serves as the Senior Currency Strategist at FXCM in New York where he shares editorial duties with Kathy Lien.
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