The Basics of using the MACD to Identify Momentum and Direction

The Forex MACD, Moving Average Convergence Divergence, is a well known and accepted indicator for momentum trading. It is popular for trading Equities, Forex and Futures.

MACD convergence or MACD divergence can present many false trading opportunities. Because of these false trading opportunities it is often used with another technical trading oscillator or indicator that signals over-bought and over-sold price conditions.

The MACD is simple yet effective. It is comprised of two basic components. The first component is the difference of the 26 EMA (Exponential Moving Average) and the 12 EMA. The second component is the 9 EMA.

The MACD becomes a measurement of trending price strength or weakness using a higher time frame price chart. Trade entry is on smaller time frame chart allows shorter trades to be opened at high price points along the larger downward trend or at lower price points along a larger upward trend. It is using the MACD for wave trading.

trade-screen-graph-blue-forex-bar-chartsMany traders argue that moving average lines should be used instead of a MACD oscillator. Moving average lines do not provide a histogram format. It is trading preference.

An experienced trader has rules for using the Forex MACD for trade entry and trade exit. One might determine it is sufficient that entry in the direction of the trade be confirmed by a single bar of the larger time period and a single bar in the smaller time period. Another trader might require the histogram bar of the Forex MACD be above or below the 9 EMA signal line. They are looking to enter only when the conditions are best for them using their trading style to succeed.

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