MACD is the simplest and very reliable indicators used by many Forex traders. It calculates and displays the difference between the two moving averages at any time. MACD developer Gerald Appel has found to be the most suitable for both faster and slower moving markets. These custom MACD settings will make indicator signal faster, however, the rate of false signals is going to increase. MACD indicator is based on Moving Averages in their simplest form. MACD line is created when longer Moving Average is subtracted from shorter Moving Average.
As a result a momentum oscillator is created that oscillates above and below zero and has no lower or upper limits. MACD also has a Trigger line. Combined in a simple lines crossover strategy, MACD line and trigger line crossover outperforms EMAs crossover. 12 EMA and 26 EMA on the chart have crossed. If to take 26 EMA and imagine that it is a flat line, then the distance between this line and 12 EMA would represent the distance from MACD line to indicator’s zero line.
The further MACD line goes from zero line, the wider is the gap between 12EMA and 26 EMA on the chart. The closer MACD moves to zero line, the closer are 12 and 26 EMA. MACD histogram measures the distance between MACD line and MACD trigger line. MACD indicator is famous for its MACD Divergence trading method. Divergence is found by comparing price shifts on the chart and MACD values. MACD Divergence phenomenon occur as a result of shifting forces on the Forex market.
For example, while Sellers may seem to be dominating the market at the moment and price continues to trend down, there already might be signals for an overall weakening of Sellers power. This key warning moments can be observed with MACD indicator. What Forex traders would see is that despite price making new Lower Lows, MACD doesn’t confirm that and instead registers a Higher Low, signaling that Sellers are running out of steam and a trend change is on its way. Opposite will be true for Buyers. With MACD divergence spotted Enter the market when MACD line crosses over its zero point.
Entry order on the breakout of that trend line. MACD divergence trading method used not only to predict trend turning points, but also for trend confirmation. I noticed you look at MACD line to identify divergence. I learned earlier that traders also look at MACD histogram to trade divergence. Could you please explain the difference. As you have noticed our MACD indicator has 3 elements: MACD line, a Signal line and a histogram.
There MACD has only 2 elements: a MACD itself which is displayed as a histogram and a Signal line. Could be of use to some traders looking to learn basic principles of MACD trading. You cold be making a mistake common among traders: they set distant profit targets while trading small time frames. With small time frames your targets should be small.