Moving Average Conversion - Divergence (MACD)

One very important forex trading indicator that is based on moving averages is called the Moving Average Convergence Divergence, or the “MACD.”

Many traders use this indicator to decide entry- and exit-points from trades. Some, on the other hand, say that it lags trends too far. Experience on your own behalf will enable you to decide.

How Is MACD calculated?

The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

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When the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. On the other hand, when the MACD rises above the signal line that is a bullish signal, which suggests that the price of the currency pair is likely to move higher.

Some traders also interpret divergence from the MACD as a clear signal of momentum. In other words, a falling MACD and a rising price suggest that momentum is turning higher.

This is not a strategy that all adopt, and it depends very much on long-time observation of a given currency pair.