How to use MACD in Forex Trading?
All forex traders try to find a trading strategy that works for them. Technical analysis is widely used and usually consists of multiple technical indicators. The MACD (moving average convergence/divergence) is at the center of many manual and automated trading strategies, developed by Gerald Appel in 1979. It measures the strength, direction, momentum, and duration of price action. Since it delivers plenty of insight, it became one of the favorite oscillators in forex trading. Given its popularity, many MACD indicator how to use tutorials exist, and learning how to read the MACD can allow new traders to develop their strategy. Remember that successful entry and exit points should come from two or three sources to confirm the validity.
How to use MACD indicator in day trading?
The first step is to understand the different variables of the MACD indicator. Three time series, usually based on the closing price of an asset, form the MACD. A slow and fast exponential moving average (EMA) create trading signals. The default settings are a 12-day EMA for the fast one and a 26-day EMA for the slow one. The difference between the two forms the MACD line. The signal line, the 9-day EMA of the MACD line, provides trading signals. The MACD histogram is the MACD line minus the signal line and offers additional information to technical traders. The MACD is a lagging indicator and works best when price action trades in a well-defined range. Once price action moves rapidly above or below the trend, the MACD becomes less reliable.
The MACD crossover or MACD crossing provides the most frequent trading signals and is often used by scalpers or traders with a preference for expert advisors (EAs) in the MT4 or MT5 trading platforms. It refers to the MACD signal line, the 9-day EMA of the MACD line, crossing above or below the MACD line. Traders who wish to buy an asset will do so when the MACD signal line crosses above the MACD line, and sellers will do the opposite. They will sell when the MACD signal line crosses below the MACD line. While MACD crossovers appear frequently, they present the least reliable buy and sell alerts, and traders must use other aspects of technical analysis to confirm them. Many traders use EA’s that trade purely on MACD crossovers, which generally result in long-term losses.
A more reliable trading signal is when the MACD line and the signal line cross above or below the 0 levels. Some refer to its as a MACD golden cross. In technical analysis, a golden cross occurs when the 50 DMA crosses above the 200 DMA, indicating a strong uptrend. The opposite is a death cross when the 50 DMA crosses below the 200 DMA, suggesting a strong downtrend is likely to follow. Inexperienced traders may refer to the MACD signal line crossing above the MACD line as a MACD golden cross. Given the lack of reliability, a more dominant trading signal occurs when the MACD signal line crosses above the MACD line, as both move from below 0 to above 0 with a rising MACD histogram.
The most reliable trading signal is a positive or negative divergence in MACD relative to price action. For example, if the price continues to move higher and the MACD moves lower, then a negative divergence forms. It suggests weakness in the uptrend, and traders should look for short-selling opportunities. Should an asset move lower while the MACD moves higher, a positive divergence alerts traders to look for buying opportunities. More advanced traders will either buy or develop a MACD cross alert indicator, allowing them to take advantage of more trading opportunities across multiple assets.
How to trade MACD in Forex?
Learning how to use MACD indicator in Forex trading can deliver the edge many traders try to find. There are four types of trading signals from the MACD indicator, and it depends on each trader how, if, and when to use them. MACD trading signals work best if used together with other technical indicators. Some prefer to use them as a stand-alone signal provider with nothing more than support and resistance levels provided by Fibonacci retracement levels. Once a trader can answer the question of how does MACD work in forex, the opportunities in using MACD as part of a strategy are endless.
The four MACD trading signals:
- MACD Crossover: It refers to the MACD signal line crossing above or below the MACD line, creating buy and sell signals. They are the most common trading signal generated by MACD.
- MACD Golden Cross: Some refer to the simple MACD crossover as a golden cross, but a more accurate and less used definition provides better trading signals. A MACD golden cross occurs when the MACD signal line crosses above the MACD line, and both lines cross from below 0 to above 0. It confirms the start of a robust bullish move, similar to a traditional golden cross.
- MACD Histogram: Some traders base their buy and sell signals on the MACD histogram. They place a buy order once the MACD turns from negative to positive. A sell order is placed when the MACD histogram turns from positive to negative.
- MACD Divergence: The most reliable and less frequent trading signals from the MACD is a divergence. Traders will buy an asset if price action moves to the downside while MACD moves higher. A sell signal is the opposite, price action moving higher with MACD moving lower.
Let’s take a final look at a MACD crossover or MACD crossing. Since it is the most common trading signal from the MACD indicator, many like to act on it. The best way to filter false signals from accurate ones is to use a MACD crossing in the direction of the trend and avoid counter-trend signals. Traders must identify and confirm the trend of an asset, then use the MACD crossing that follows the trend. In other words, in an uptrend, only act on buy signals when the MACD signal line crosses above the MACD line. In a downtrend, traders must sell when the MACD signal line crossed below the MACD line. Ignoring counter-trend signals can prevent traders from placing trades with a high probability of a loss. There are counter-trend trading strategies for advanced traders who have access to automated trading solutions or have time to monitor price action constantly. For most traders, it is best to use the MACD crossing in the direction of a trend.
What does MACD mean in Forex?
MACD refers to the moving average convergence/divergence (MACD) technical indicator. It is one of the most used technical analysis tools and can offer reliable trading signals. Manual traders use it as a staple of their trading strategy. It is also popular among automated trading strategies and EAs for the MT4/MT5 trading platforms.