When trading the Forex market, many traders use the indicators that are built-in to the popular trading platform, Metatrader 4. One of the simplest and most effective indicators available is the MACD or moving average convergence divergence indicator. Here are the basics of the MACD and how you can use it to analyze the Forex market.
How to Access
When using the Metatrader platform, gaining access to the MACD indicator is simple. Go to “Insert” at the top of your screen. Then click on “Indicators” followed by “Oscillators” and then “MACD”. This will insert the MACD indicator into your chart.
What is MACD
The MACD indicator is one of the most accurate ways to determine the direction of a trend in the Forex market . It uses a combination of moving averages to figure out if the market is moving up or down.
The MACD is comprised of three numbers that represent moving averages. The first number represents the faster of the moving averages on the chart. The second number is the slower one and the third is the moving average of the difference between the two time frames.
When you use this indicator, you will see two lines drawn on the chart. The two lines represent the difference between two moving averages and are not actually moving averages of the price.
How to Use MACD
When using the MACD indicator, you are trying to find out when a trend is forming. Since you are dealing with moving averages from different time frames, the moving averages will react at different times. When a trend is about to form, the faster moving average will move first.
When this happens, the faster moving average line will start to move towards the other line and eventually cross over it. Once the line crosses over and starts to move away from the other line, this is an indication that a trend is forming.
Advantages
The primary advantage of using this indicator is that it can help you determine when trends are starting, which could help you net large amounts of pips on a trade. It can also help you determine when the trend is ending so that you can close out your trade and keep most of your profit.
Drawbacks
Although the MACD is effective, it is not perfect. To calculate a moving average, the indicator has to look at past price data. This means that the information you see is technically lagging behind the market. The timeframes you choose to use for your indicator will also affect how accurately it identifies a trend.
The MACD is often combined with other Forex indicators to try to more accurately determine entry and exit points into the market.
Authored by Luke Arthur
Luke Arthur is a Forex trader and creator of the site Forex Trading Rookie. If you are a beginner and you need some clarification on software, trading strategies and Forex basics, this is the place for you.
Some time ago I have created close analog of MACD called FX Pulse. It shows trend for all time frames simultaneously. Looking to the fastest and than to slower one, you can determine trend direction and make profitable trade.