Introduction

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.

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.

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