MACD Indicator Guide In Forex Trading

In technical analysis you will come across various indicators. There are indicators that can be used to trade trends and there are indicators that are useful for trading ranges. Indicators that signal price change in advance, are called leading indicators. Indicators that display what is happening in the market currency are called lagging indicators.

Moving Average Convergence Divergence, or MACD for short is a trend-following Forex indicator that is commonly used by the majority of Forex traders. It shows relationships between two EMAs, where a longer period EMA is subtracted from a shorter one. Let’s find out what FX MACD indicator is and how to use it in Forex.

MACD indicator overview

MACD is a trend following indicator that is also a momentum indicator. MACD uses two moving averages. The indicator is plotted as an oscillator placed at the bottom of a chart. It shows the strengths of the prevailing trend along with the signals of the change in trend.

• Indicator type: Lagging Indicator
• Best Timeframe to use – Longer term EMA = 26 period, Shorter term EMA = 12 period
• Goes best with: Stochastic
• Placed on: Below the chart

Technical details of MACD indicator

As we mentioned, MACD is a trend-following Forex indicator, it is a simple and effective indicator to use. As a result, it can be used by both experienced and inexperienced traders. It looks at the relationship between two EMAs, which are exponential moving averages. In general, the indicator uses 26 and 12 periods for Moving Average timeframes, but you can change these numbers according to your trading strategy.

How to calculate MACD

Calculating MACD is simple. As we mentioned above, first we need to calculate two moving averages that are usually set as 12-period and 26-period EMAs.

Here you can see the formula for calculating EMA:

EMA = (close price – previous EMA) x K + previous EMA

K = (n + 1)/2 where n is the number of days we are calculating EMA for.

Once this is calculated we simply need to calculate MACD using the following formula:

MACD = 12-period EMA – 26-period EMA

After calculating MACD, it is placed on a histogram, where we use baseline and also put 9-period EMA as a signal line. The 9-period is general and can be changed based on your strategy. Each bar represents the distance between the MACD line and Signal line. When MACD is above, the bars are green. When the Signal line is above, the red bars are formed. The bigger the bars, the stronger the trend.

What does MACD tell us?

MACD is a trend-following and momentum-based indicator that shows us which direction the market is leaning towards. Since we are subtracting two different period EMA’s from each other, MACD can be either below or above 0. When it’s above, it means that short-term EMA is higher than the long one, and the opposite is when MACD falls below the 0 line. As an additional indicator, traders put 9-period EMA on top of MACD and use it as a signal line and look if MACD is above or below the signal line. This information is then used to make different decisions based on where MACD is located at. Below zero and the signal line, it means that a downtrend is in process, while if MACD is above these lines, it indicates an uptrend.

Practical application of MACD indicator

Applying MACD to your everyday trading activity is not that difficult. When looking at formulas needed to calculate MACD it might seem a bit complicated, especially the EMA formula, but every famous trading platform offers an in-built MACD indicator where the system calculates everything for you. It is also easy to read the indicator as it seats below the chart and is highly visual.

Keep in mind that the Forex trading MACD indicator is a trend following indicator and therefore, doesn’t do well in choppy and ranging markets. We’ll discuss MACD indicator examples and strategies that traders can use when trading on the Forex market.

Crossover

The most commonly used strategy when trading with MACD is crossover. According to this strategy, when the lines: the signal and MACD lines cross each other, we have a trading signal. However, traders need to make sure the market is trending and not in a range. When MACD is used in ranges, crossovers are often producing fake signals. Often MACD is used in combination with trendlines and other indicators to increase the accuracy.

Histogram reversal

Another famous strategy that uses MACD is histogram reversal. The MACD histogram consists of bars representing the distance between MACD line and baseline. When looking at this histogram, the length of the bars represents the distance between the 12-period and 26-period EMAs. The bigger the bars, the stronger the trend.

Histogram reversals help identify the trend changes. When upper bars get smaller and smaller and the lower bars start forming, histogram reversal takes place.

History and other useful details of MACD indicator

Gerald Appel developed the MACD indicator in the late 1970s. It was originally developed for usage in Stock markets. However, ever since then, people realized that this was a good technical indicator in almost every market. Nowadays MACD is used in Stocks, Forex, Crypto, and other financial markets. Being a popular indicator does not mean that it does not have people who criticize it. One of the biggest problems some people see in MACD is that many reverses are not preceded by divergences, and divergences don’t always result in reversals. Every indicator works best when used in certain market conditions. Markets often go from uptrends to ranges to downtrends, etc, which makes choosing proper indicators difficult.

FAQs on MACD indicator

What is the accuracy of MACD indicator?

MACD indicator is a lagging indicator that produces signals in trends. The accuracy depends on market conditions. The indicator does not perform well in ranges, but it’s great in trends.

How does MACD indicator analysis work?

MACD helps determine strengths of trends. MACD is usually used in combination with trendlines and other indicators when traders are analyzing the market.

Is MACD indicator good for Forex?

MACD indicator was originally developed for the Stock market, but people soon realized that this is a good technical indicator for the Forex market as well. So yes, MACD is a good indicator for Forex trend trading.