The Moving Average Convergence Divergence-MACD Indicator
As a trader, you must become familiar with the Moving Average Convergence Divergence (MACD) indicator. This is one of the most reliable yet the simplest forex indicator.
This is a hybrid tool that is helpful in determining the present market direction as well as measure the price momentum. Many traders use MACD as their sole confirming indicator. This multi faceted indicator acts as a sign of the trend momentum by representing the relationship between the two moving averages.
MACD line is the difference of two exponential moving averages. Another line is plotted alongside the MACD line and that is the exponential moving average of MACD itself.
The usual settings for MACD are 12, 26 and 9. MACD is calculated by subtracting the 26 day EMA from the 12 day EMA. A 9 day EMA of the MACD called the signal line is plotted on top of the MACD and acts as the trigger for the buy and sell signals.
When the two EMA move apart, it means the trend is gaining strength and when the two EMAs come closer together, it means the trend is weakening and losing strength.
MACD chart comprises of a histogram in addition to the line chart. The MACD line is colored dark and usually is black while the trigger or the signal line is colored light usually grey. When these two lines come close, it indicates the weakening of the trend and when they move further apart, it means the trend is gaining strength.
When the bars move away from zero, it indicates the momentum is increasing and when the bars move towards zero, it means the momentum is decreasing.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Try these Forex Signals by two top gun traders in a friendly competition. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade.
by: Ahmad Hassam
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Date: Sun, 19 Dec 2010
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