Forex Technical Analysis Articles - Moving Average Based Indicators - MACD (Moving Average Convergence Divergence)

Technical Analysis

1. Introduction

2. Construction

3. Crossover Signals

4. Crossover Signals Continued

5. Oscillation

6. Centerline Crossovers

7. Combining MACD Crossovers and MACD-Line

8. Divergence

9. Conclusion

The MACD indicator charts the convergence and divergence of short term and long term moving averages. The principles applied are similar to using crossovers with two moving averages (see Moving Averages article), which is fundamentally what the MACD does. The MACD indicator takes moving average analysis a step further.

MACD shows graphically when the short term movements of price rise or fall faster than the longer moving average would suggest. This indicates the recent trend. During an uptrend, for example, the shorter moving average is rising faster than the longer moving average, creating a bigger gap (difference) between them.

MACD has several uses and can provide a trader with these pieces of information.

When the lines in the MACD indicator cross they generate buy and sell signals.

Centerline crossings indicate bearish and bullish markets or sentiments.

The oscillation of the indicator shows overbought and oversold levels.

Divergences can spot market tops and bottoms.

EUR/USD - Daily Chart - December ‘05 - April ‘06 MACD Figure 1

Figure 1 – MACD indicator with blue fast line and red signal line.

By the end of this article you should be able to go back to this chart and using MACD, decipher the information it gives on the Euro/Dollar pair’s movements.

Table of Contents

1. Introduction
Here we explain some of the basic information that the MACD indicator provides.

2. Construction
The MACD is an oscillator that looks at the difference between two exponential moving averages. When plotting a MACD indicator two lines show up, the MACD line and the signal line.

3. MACD Crossover Signals
MACD crossovers generate signals when the two MACD lines cross.

4. MACD Crossover Signals Cont.
MACD crossovers generate signals when the two MACD lines cross.

5. Oscillation
MACD moves up and down around a centerline at zero. The centerline is the neutral measurement and the oscillation up and down by the MACD lines represent if the currency pair is overextended.

6. Centerline Crossovers
We show how centerline crossovers indicate bearish and bullish phases in the market.

7. Combining all the Interpretations
We combine all three prior interpretations into a thorough example.

8. Divergence
To spot divergences one examines the direction of the MACD lines to the price line in order to see discrepencies.

9. Conclusion
The article's main points are summarized.