Lesson 26 – MACD, A Guide for Forex Traders
By now, you should have read and understood both the Moving Averages and the Relative Strength Index (RSI) indicators. These will be key to understand before moving on the MACD, which is a little more complex.
MACD is short for Moving Average Convergence Divergence. And it is a trend momentum indicator.
At first impression, the MACD can seem a little confusing. But not to worry, we will break it down into its component parts and show how one might use it in your forex trading strategy.
It would be ideal if you bring up the MACD in your demo account to see and interact while going through the rest of this lesson to best understand everything.
What is the MACD made of?
The Horizontal (often white or black) line in the middle is the “zero” line and acts as our basis level.
The next line you will notice is the “MACD” line which is calculated by subtracting the 26 day EMA from the 12 day EMA.
The last line you will notice is the “Signal” line which is a simple 9 day moving average of the MACD line.
The red and green bars you will see on the chart are called the “histogram”. These show how far the two lines on the MACD are from crossing each other. As you will see, the closer they get to the crossing, the closer the histogram bars approach the “zero” line.
Bullish or Bearish MACD
Put simply, the market is assumed to be bullish when the MACD and the signal lines are both found above the zero line and bearish when both are below the zero line.
Quite simple, don’t you think?
So how do we trade with the MACD?
The trading strategy is quite simple when using the MACD. We simply wait for a crossover between the two MACD and Signal lines as a signal to enter a trade. Depending on where the lines cross in relation to the zero line, we either look to open long or short positions.
If there is a crossover below the zero line, then this is an indicator for a change in momentum and is a signal for us to open a long position.
If there is a crossover above the zero line, then this is an indicator for change in momentum and is a signal for us to open a short position.