23 Oct, 2006
FOREX charts: Moving Average Convergence-Divergence (MACD)
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Probably you had seen this chart on your FOREX trading software and wondered what all those lines means and measures, MACD is a chart that shows the average of the difference between two moving averages. On the charts you can see two lines on an open scale against the zero line, one fast and one slow, those lines tells you the difference of the original two moving averages and the moving average of the difference. On the chart each one of the two lines will be defined by a different color or one line will be one line a solid line and the other a dotted line. Frequently used settings are 12 and 26 period exponential moving averages with 9 period exponential moving averages as the signal line.
On the chart you’ll see only two lines even though there are three moving averages mentioned. If the faster crosses above the slower line then you’re recommended to buy and vice versa. Another indicator this chart offers for FOREX users is as far as both the lines are above the zero it shows you the more overbought it becomes and as far as both lines are underneath the zero is shows you the more oversold it becomes. It may also lead to a stronger signal if the signal line crosses down when it is overbought and crosses up when it is oversold.
Incase that the MACD is making new lows and the price of the security is not making new lows there is divergence. Also, if the MACD has made a high and starts to head down but price continues up that is bearish divergence and by using this information you can predict a change in the direction. MACD is commonly used as an indicator for divergence.
For conclusion MACD in a common tool FOREX trader and investor use to analysis and forecast the market, when using it wisely it can help you make a nice profit.
