“Moving Average Convergence Divergence”, or MACD, while of little importance to lay people, can and does mean a lot to modern Forex traders. You see, identifying trends and capitalizing on them should be a piece of cake, even for total rookies – in theory. In real life, however, it takes some considerable effort to identify and predict future trends. Moving averages help, but even they can only go so far. This is where the MACD steps in.
What is Moving Average Convergence Divergence?
Let’s start from the basics: MACD is a type of indicator that helps you compare moving averages. For instance, if you take a 12-day exponential moving average and deduct a 26-day exponential moving average from it (and keep in mind that both averages need to refer to the same stock, commodity or in this case, currency), you get the MACD for the underlying financial instrument. From there, you just need a ‘signal line’ of sorts, typically a 9-day exponential moving average and you’re set. This should give you an accurate indicator telling you whether to buy or sell. Namely, whenever the MACD gets below the line, it means the price is going to fall and it’s time to sell and vice versa – when it gets above, it means buying is a good idea. Of course, this does not necessarily mean anything beyond a possibility, but keep in mind that many Forex traders keep an eye out for this sort of thing, and their combined actions may eventually push the price in the predicted direction regardless of other issues. Then again, people have been burned quite a few times, and many opt to wait for confirmation before going through with any trades. This course of action seems safest. Naturally, no trend lasts forever, and the divergence between the MACD and the actual price is the proof of this.
How can MACD be used by Forex traders?
Forex traders can base their trades, long and short alike, on the MACD combo trading strategy. MACD combo enables them to begin trend trading at an opportune moment and end before it’s too late. Rather, it can tell them if this is a good time to get in on a trend or get out as it is drawing to an inevitable end. Although, a strategy is only as successful as the one who employs it, something many Forex traders come to find all too late. For a long trade, you engage if the price is above the nearest moving average by some 10 pips and went positive within the last five bars. The exit point is 10 pips below the shorter moving average. Just don’t forget the stop position, five bars below the entry in the beginning and moved to the break even point during the trade. Short trades work similarly, except the price is supposed to break downwards and plummet instead of rising. Basically, if MACD combo executed right, this strategy can yield huge profits at very low risk.