Moving Average Convergence Divergence Indicator

Moving average Convergence / Divergence (MACD) was originally constructed by Gerald Appel an analyst in New York. Originally designed for analysis of trends in stocks and bonds, it is now widely used in many markets.

The MACD is based on moving average is a lagging indicator or delayed, but the MACD is more sensitive to price movements.

The MACD indicator consists of two lines, the first line in the traditional MACD is the MACD line, and it uses exponential moving average price of 12 periods (fast EMA) minus the exponential moving average price 26 periods (slow EMA) .

MACD = EMA [12] of price - EMA [26] the price

The line generated varies along the zero line (Center Line) without upper and lower limits.
Note: You can apply the EMA 12 and EMA 26 closing price, the opening price, high price, low price, the average price ((high + low) / 2), the typical price ((high + low + close) / 3) and the weighted average closing price ((high + low + close + close) / 4). The suggested retail price and the most used, is the closing price.

The second line is called the signal line and uses a simple moving average 9 period of the previous line (MACD line).

Signal = MACD - SMA [9] of MACD
MACD

MACD settings:

The typical recommended settings for MACD is the 26 EMA for the slow moving average, the EMA 12 for the fast moving average and the SMA 12 for the signal line.

But you can choose settings to suit your investment style. Note that shorter moving averages will produce quicker indicator that is more sensitive to price movements while the slower moving averages will produce a slower indicator that is less zigzag.
How to use the MACD indicator to invest in Forex?

The MACD indicator is a signal generator bulls and bears that are used to predict the market movement.

This can be used in different ways, the methods used with MACD trading are:
1 - Crossing the moving average
2 - Crossing the center line.
3 - Divergence.

Crossing the moving average:

When the MACD crosses above simple moving average of period 9, a bullish signal is generated.
MACD - Moving Average Crossover - Buy

By contrast, when the MACD crosses below simple moving average of period 9, a bearish signal occurs

MACD - Moving Average Cross - Sell

These signals are often false and must be confirmed with other indicators signals.

Crossing the center line:

When the MACD crosses above (from bottom to top) the zero line (center line), a bullish signal occurs.
By contrast, when the MACD crosses above (from top to bottom) the zero line, a bearish signal occurs.

Like crossing signals moving average, these signals must be confirmed by other MACD signals (Divergence for example) or by other indicators.

Divergence:

When the MACD diverges from the market trend, it diverges from the trend when the MACD makes new highs while the price trend fails to reach those high spots and if there is a bullish signal.
Divergence in the MACD


Notice how the prices make new highs but the MACD indicates that it is weakening the downside, since it fails to maintain the same high. We see a drop in price right after this sign.

By contrast, the downward signal occurs when the MACD makes a new low while the price trend fails to achieve this low point.

Note: The MACD indicator can also be used as an indicator of overbought and / or oversold when the moving average period 12 (fast EMA) has been crossing the 26 period moving average (EMA slow).