Tuesday, October 7, 2008

MACD Forex Indicator




Not So Average The Moving Average Convergence Divergence (MACD) forex Indicator


Stocks and indices trend higher and trend lower on a short-, intermediate- and long-term scale. However, trends are composed of a period of backing and filling. This step-like action produces “mini” trends within the bigger picture. Savvy traders can exploit these smaller-scale trends for profit, and one of the best tools for this is an indicator called the Moving Average Convergence Divergence (MACD).

The MACD was developed by Gerald Appel, and is one of the simplest, most reliable indicators available for all types of forex traders. The forex indicator uses moving averages, which are essentially lagging forex indicators, to include some trend-following characteristics. These lagging indicators are converted into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The result is a line that oscillates above and below zero, without any upper or lower limits. Like many forex indicators we use, it is a centered oscillator, meaning that it will always gravitate toward the center line when the forex trend is reversing.
To completely understand the MACD, one needs to recognize that the relationship between the fast line and the slow line is critical. On a standard forex MACD, the fast line results from the difference between the 26-day exponential moving average (EMA) of the closing prices subtracted from the 12-day EMA of the closing prices, giving the calculation for the fast line. Further, the slow signal is a moving average of the fast line. You can determine the slow forex signal by calculating the nine-day EMA of the fast line. The calculation for the fast line is 12 and 26 days, or if you’re forex trading on a longer-term scale, weeks. But, you will find that all forex software programs available will use days rather than weeks. The defaults are easily changed if the technician wishes to changes the time period. Appel and others have tinkered with these original settings to come up with a MACD that is better suited for faster or slower securities. Using shorter moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a slower indicator, less prone to whipsaws. For our purposes in this article, the traditional 12/26 MACD will be used for explanations.
If you’d like to study the advanced uses, there are many books on the subject.
The slow period is always a nine-day or one-week period. The two EMAs will tend to cross over each other from time to time, signaling buy and sell action. It is clearly understood that crossovers will signal the beginning and the end of both up trends and down trends. Much has been written about the centerline of the MACD being the key to the strength, as we will see when we go to some examples. When the crossover occurs, whether indicating a buy signal or a sell signal, knowing where it happens in relationship to the center line is going to determine just how powerful the movement is going to be.

A positive MACD indicates that the 12-day EMA is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is broadening. The interpretation of that is the rate of change of the faster moving average is higher than the rate of change for the slower moving average. Positive momentum is escalating and this would be considered bullish. If MACD is negative and declining further, then the negative opening between the faster moving average and the slower is getting bigger. Downward momentum is “snowballing” and this would be considered bearish for the stock or index. MACD centerline crossovers occur when the faster moving average crosses the slower moving average.
Now that we’ve covered the mathematical side of the MACD, let’s take a look at the art of interpreting the indicator. There are three common methods for making investment decisions with the MACD:
I. Crossovers – As we touched on above, when the MACD falls below the signal line, it is a signal to sell. When the MACD rises above the signal line, it is a signal to buy.
II. Divergences - When a security or index diverges from the MACD indicator, it often signals the end of the current trend.
III. Overbought/Oversold - When the MACD rises dramatically (i.e. the shorter moving average gets extended away from longer-term moving average), it is a signal the security is overbought and will soon return to normal levels.

Let’s take a look at a few examples. These examples are primarily showing the first method of interpretation (the crossovers). However, the other two are easily applied.
Our first example is a daily chart for Goldman Sachs (GS). During this time frame, GS had been in a down trend. It transitioned and then moved into an up trend. I’ve drawn red and green vertical lines on the chart to show you where you would have bought (green lines) and sold (red lines) the stock simply on the MACD crossovers. In this instance, the MACD was hitting the ball out of the park. During the transition period, you made significant gains to the upside without taking on the risk of the significant corrections. In fact, I’d venture to say you outperformed the stock if you had bought and held it and you outperformed the buy-and-hold strategy with less risk. Keep in mind that the most powerful signals, and thus the most valid signals, are given when the stock is the most extended away from the center line. Thus, crossovers in any place are valid buy-and-sell signals, but the “best” signals are the ones given further from the zero line.
Let me clarify that the forex MACD is represented in two ways on this chart. First, it’s showing the general line crossovers via the red and blue lines. Second, there is a pink MACD Histogram showing you the buy and sell signals. Both give the exact same signals. However, the histogram gives buy and sell signals as it crosses the mid line. Again, they both give the exact same signals, but read a tad differently.



Next, let’s take a look at the longer-term picture of the market as we transitioned from a bear to a bull market in late 2002. The chart below is a weekly chart for the S&P 500. For longer-term traders who want to do less trading and simply position trade, using weekly charts is an ideal scenario. In the example below, the market only gave six trade signals over a period of three years. The first three signals were pretty much whipsaws in both directions. However, the last three gave significant returns and, again, offered the investor much less risk. The MACD got you in the market while it was trending higher and kept you out during corrective phases.
The MACD is an indicator that will help all chartists in their trend analysis and assist you with your ability to get in and out of situations in which it may be tempting to remain in the hopes that fortunes may turn around. I have found the indicator to be particularly effective when you come across stocks that are transitioning from down to up trends.

Finally, as I always preach to you, no indicator is an “end-all” by itself. The MACD is going to be much more effective for you if you attach a solid “internals” indicator like Money Flow or (my favorite) On-balance Volume. Remember, you have a number of tools in your toolbox and you shouldn’t be afraid to use them in combinations.

6 comments:

  1. I would like to suggest that you pick the #1 Forex broker: eToro.

    ReplyDelete
  2. Learning how to how to read binary candlesticks using this method, especially for beginners in Forex trade, is a great step in ensuring that the business is profitable to them. The purpose of this article is to educate beginners in Forex on how to trade using the binary options, sometimes referred to as digital trading options.

    ReplyDelete
  3. Please ignore earlier Mail, Copy Given below article while posting.

    Do you think that to dramatically improve your success rate you have to read tons of thick books, buy expensive software and spend countless hours of learning more about Forex?

    What I'm going to share with you is something very EASY to use and very POWERFUL at the same time.

    Let me give you an EXAMPLE:

    Imagine you trade a system that makes 50% winning trades, but another 50% are losing trades. If you increase your odds of winning by only 20%, that would make 70% winning trades and 30% losing trades.

    Well, HOW TO accomplish that?

    Just pick the best trending pair at the current time and simply follow the trend! I have found ONE INCREDIBLE TOOL that continuously scans the Forex market and picks the most reliable trending pairs for you.

    http://www.forextrendy.com?ljsjhd8374h

    By taking signals in the direction of a strong trend you would REDUCE UNNECESSARY LOSSES and increase the odds of winning. You need to know "how well" the market is trending to avoid very short-term trends.

    STOP hunting the market for every potential trade. Pick only the best trending pairs and time frames and DO NOT take any trading signals in the choppy market (unless you know exactly what you are doing).

    Successful traders keep it simple and this is the way how the pros made fortunes in the markets - by trading less and making more.

    To increase the profitability of any system or robot you are currently using, check out this easy and powerful ultimate solution:

    http://www.forextrendy.com?ljsjhd8374h

    ReplyDelete
  4. Drawing trend lines is one of the few easy techniques that really WORK. Prices respect a trend line, or break through it resulting in a massive move. Drawing good trend lines is the MOST REWARDING skill.

    The problem is, as you may have already experienced, too many false breakouts. You see trend lines everywhere, however not all trend lines should be considered. You have to distinguish between STRONG and WEAK trend lines.

    One good guideline is that a strong trend line should have AT LEAST THREE touching points. Trend lines with more than four touching points are MONSTER trend lines and you should be always prepared for the massive breakout!

    This sophisticated software automatically draws only the strongest trend lines and recognizes the most reliable chart patterns formed by trend lines...

    http://www.forextrendy.com?kdhfhs93874

    Chart patterns such as "Triangles, Flags and Wedges" are price formations that will provide you with consistent profits.

    Before the age of computing power, the professionals used to analyze every single chart to search for chart patterns. This kind of analysis was very time consuming, but it was worth it. Now it's time to use powerful dedicated computers that will do the job for you:

    http://www.forextrendy.com?kdhfhs93874

    ReplyDelete
  5. Do you think that to dramatically improve your success rate you have to read tons of thick books, buy expensive software and spend countless hours of learning more about Forex?
    What I'm going to share with you is something very EASY to use and very POWERFUL at the same time.
    Let me give you an EXAMPLE:
    Imagine you trade a system that makes 50% winning trades, but another 50% are losing trades. If you increase your odds of winning by only 20%, that would make 70% winning trades and 30% losing trades.
    Well, HOW TO accomplish that?
    Just pick the best trending pair at the current time and simply follow the trend! I have found ONE INCREDIBLE TOOL that continuously scans the Forex market and picks the most reliable trending pairs for you.
    ==> http://www.forextrendy.com?ljsjhd8374h
    By taking signals in the direction of a strong trend you would REDUCE UNNECESSARY LOSSES and increase the odds of winning. You need to know "how well" the market is trending to avoid very short-term trends.
    STOP hunting the market for every potential trade. Pick only the best trending pairs and time frames and DO NOT take any trading signals in the choppy market (unless you know exactly what you are doing).

    Successful traders keep it simple and this is the way how the pros made fortunes in the markets - by trading less and making more.
    To increase the profitability of any system or robot you are currently using, check out this easy and powerful ultimate solution:
    ==> http://www.forextrendy.com?ljsjhd8374h

    ReplyDelete
  6. "Which Forex pair and time frame is best to trade" is the frequently asked question and I want do give you the DEFINITE ANSWER.

    Are you expecting that I am going to say something like EUR/USD on 5-minute time frame or GBP/USD on daily...? No, it is not so simple, but SIMPLE ENOUGH we can figure it out!

    The "PROBLEM" is that markets change over time. If GBP/USD was a well trending currency pair a few years ago, today it is another one.

    I actually want to let you know about a SPECIAL TOOL that I use to find the BEST TRENDING PAIRS among all the Forex pairs.

    http://www.forextrendy.com?hfsdtb63546

    The software scans 34 Forex pairs on all time frames from minute to monthly. This way you pick the best trending pair and time frame at the current time.

    The system is running on our powerful computers, so you have nothing to download and install. Just join in and start using it within a FEW MINUTES! Get it on the link below:

    http://www.forextrendy.com?hfsdtb63546

    ReplyDelete