How to use macd indicator in forex trading?

To make the trading process easier and more successful many brokers and traders prefer to use forex economic indicators. These are half-automatic programs and aim at depicting this or that criteria depending on a demand. They help to analyze a currency market.

All indicators are founded on the following statistic indexes: the auction volume and prices. Analyzing these functions a trader can forecast whether a current trend tends to change or remain the same for a certain length of time. Traders rely on the mathematical calculations and know when to open or close their deals. However, the indicators do not take into consideration fundamental exponents like receipts and success of the companies whose shares are in the stock market. Experts, who can be found in broker ratings, can explain the last things.

There are a great variety of different indicators that work on different platforms. Today let's analyze MACD.

What is MACD?

The indicator Moving Average Convergence or Divergence (shortly MACD) was created and worked out by Gerald Appel in 1979. It is widespread when traders deal with commodity and stock markets. MACD belongs to oscillators (technical analysis) and is attractive in its simplicity and the absence of significant “noises” when processing signals. Usually traders use this indicator as one of the components when building the best forex strategy.

It is obvious that the principle of work is in averages and visualizes them for a better perception. There are two ways of programming and analyzing the indicator:

1. linear MACD (used for trend analysis)

2. bar chart MACD (class of oscillators)

How to input MACD

To calculate the linear MACD the average price with smaller period (shorter and faster) is subtracted from the average price with bigger period (longer and slower). The result is shown in a bar graph under calculation. After that another average evens the difference, which is depicted on the bar graph.

So, the formula is the following: MACDi = long average (Pi) – short average (Pi)

The price is usually taken as a close one. However, other variants are also possible: an open price (the highest one), an average price, a typical one and so forth.

As far as a type of average is concerned, exponential one is usually taken, but common average and different types of suspended average can also be taken depending on a trader’s situation and demand.

The second signal line is calculated like this: signal line = average (MACDi).

By default the indicator has: 12 prices for a short average, 26 prices for a long one and for a signal – 9 prices.

To calculate the bar chart MACD a signal line is subtracted from MACD and the result is depicted in a new bar chart underneath the first one.

The indicator’s bar chart has also zero line that aims at showing when the prices of 2 averages are the same (indicating the balance between the short and long periods of time). The indexes over the 0-line show the ascending tendency. If the indexes are below this line, there is the descending trend.

The MACD bar chart aims at measuring the distance between the signal line and MACD itself. It depicts this difference in its own bar graph. In case the MACD is over the line, the value is affirmative. If it is lower, then the value is subzero. In places where the averages meet, the bar graph depicts the zero figures.

Note

1. It is very important to follow the minimum and the maximum of the signal line, because it means that the MACD indicator’s signal comes very soon.

2. The bar graph MACD gives an opportunity to see who is stronger a buyer or a seller and how much the difference is between them. The tilt up means that a buyer is stronger than earlier but not necessarily in comparison with sellers. The tilt down means the contrary. When the tilt in the lower zone changes from down to up, a "buy" signal comes. When the tilt in the affirmative zone changes from up to down, it may be time to sell.

3. The maximums and minimums in the bar chart MACD anticipate the changes in prices a bit. If a trader is attentive enough, he can prepare for the according actions.

The disadvantages of the MACD indicator

It is no doubt that MACD is not a perfect indicator and has its own disadvantages:

1. Many false signals.

2. The linear MACD is late as far as trend signals are concerned.

3. No universal input settings. The more detailed the information is the better signals it depicts.

When traders work in the forex currency exchange market, indicators are really good assistants as they help to follow the trends and make profitable deals. So, the use of indicators and advisors is a step towards experience and in the end to success.