Currency Trading, the basics FAPturbo, the amazing Forex Trading Robot
Oct 17

MACD (Moving Average Convergence/Divergence) is a technical indicator that was developed by Gerald Appel, a New York based analyst, in the late 1970s. He developed MACD to analyse stock trends, but it has found widespread use in other markets as well.

MACD shows the difference between a fast and slow exponential moving average (EMA) of closing prices. Because EMA’s are lagging indicators, MACD by definition is lagging too.

Using MACD

As virtually all contemporary charting software includes MACD, adding this indicator to a price chart is easy.  This is what a MACD looks like:

MACD - Moving Average Convergence/Divergence Indicator

The lower pane shows MACD with its standard 12,26,9 setting, which has the following meaning:

  • the blue line is the difference between an  EMA-12 and EMA-26, both taken from the price action show in the upper pane
  • as the blue line is the difference between two EMAs, it oscillates around the zero line, which is visible on the top of the lower pane (in gray)
  • the stippled line is the EMA-9 taken from the blue line.

Studying a MACD-chart will show multiple methods of interpreting this technical indicator:

  • The stippled line serves as a signal line, ie. when the blue line crosses the stippled line, some sort of action can be taken.
  • Some analysis methods also differentiate whether the line crossings (and the direction of the crossing) happens above or below the zero-line.
  • Yet other interpretation schemes don’t use the line crossings as an entry signal but instead use the stretches in between line crossings as trend continuation confirmation and these use other indicators for signalling entries.

As you can see, what looks as something pretty definitive can introduce fuzziness if you’re not certain about the specific interpretation scheme you intend to use…. ;)

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