MACD is one of the most popular trend following forex indicators that you can find in your MT4. Developed by G.Appel, it is simple and effective tool of measuring forex trend and momentum at the same time. MACD compares values of two moving averages applied on price.
Anatomy of MACD forex indicator
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MACD compares values of three moving averages that are applied on price. Calculation is based on 3 moving averages. By default, they are: 12,26,9. Indicator is drawn by subtracting second EMA (26 by default), from first (12 EMA by default). The last EMA (9 by default) value is than used as a signal trigger.
We can imagine EMA 26 as being flat line. EMA 12 than represents distance between two EMA lines and therefore presence, or lack of trend and its direction.
Using MACD forex indicator
Trading crossovers. Once MACD indicator moves under signal line (zero value) bearish downtrend may be present on the market. Conversely, when line moves above signal line, bullish trend may be present. This is a robust signal. It is also possible to use custom signal entry confirmation. Oscillators such as RSI or Stochastic, complement MACD very well. Chart formation can also be used to confirm trend and find most accurate position entry. EMA 9 crossing EMA 12 histogram may signalise trend reversal, and as such may be used for exit timing, countertrend positions or swing trading. As it gives lot of countertrend signals, it migt be better to set it to zero and ignore it.
MACD Divergence. We experience new top/bottom in the price movement while MACD does not draw new top / bottom based on its calculations. This discrepancy in price movement and indicators calculation may signalise imminent price reversal.
Dramatic MACD movements. Indicator may sometimes experience wild swings. Non standard movements are great opportunity to compare indicators calculations with price itself. Often times great trades can be found in these situations, as icing on the cake.