Sunday, December 11, 2011

Macd Technical Indicator Explained

June 13, 2010 by  
Filed under Forex Indicator


If you have been reading my post, you will find that I have been talking about the power of a technical indicator known as MACD (Moving Average Convergence Divergence). One very important use of this indicator will be to avoid the forex traps that occur during trading.

The reason why I love to use this indicator is because it can be used in different ways to help us in our trading and this is what I am going to share with you today in this post.

Below are ways that I use the MACD technical indicator for:

1) Read The Trend: Other than the moving average, I also use the MACD technical indicator to help me tell the trend of the market I am in. To read the trend, you simply need to see whether the MACD and its trigger lines are above or below the waterline. If they are above the waterline, you are in an uptrend and if they are below the waterline, you are in a downtrend.

Identify Trend

2) Strength of Trend: To tell the strength of the trend you are in, you can make use of the MACD histogram. The histogram is made up of bars which vary in height. When you are in an uptrend and you see the histogram shortening, what it means is the buyers are reducing and sellers are increasing and this usually mark the end of the trend or at least a retracement is coming.

When you are in a downtrend and you see the histogram shortening, it is signaling to you that the buyers are increasing and sellers are reducing and similar to the above situation, you are likely to see a retracement or a change in trend.

Identify Trend

3) MACD Divergence: This is a very powerful tool of the MACD technical indicator. Personally I feel that the divergence in MACD is one of the many reliable signals that you must trade.

When you find that the market is making higher high while the MACD indicator is making lower high, you are having a negative divergence in the market. Whenever you see the formation of negative macd divergence, it is an indication that the market is going to move down.

When you see the market making lower low while the macd indicator making higher low, you are having a positive divergence and this is an indication that the market is going to move up.

Negative Divergence

The above are 3 ways you can make use of the macd technical indicator in your trading. I have been using them with good results in my trading and I believe that it can be of great use to you as well.

If you have other ways of using this indicator in your trading, please share with us by commenting below. In addition, if you find this post useful and can be of use to anyone you know, please retweet this post to share with them.

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Comments

13 Responses to “Macd Technical Indicator Explained”
  1. bala says:

    what would be the trend like for the next week for eurusd? is it will go up? pls guide me..newbies

  2. Ram says:

    Hi kelvin

    Sometimes when price makes a higher high, MACD also makes a higher high but the MACD Histogram makes a lower high. Could you please explain how this can be treated.

    kind regards,

    Ram

    • Kelvin says:

      Hi Ram

      When you see the price making higher high and the histogram making lower high, it is a sign that the buyers are getting exhausted and the sellers are gaining strength. From this sign, it could be the price going to retrace or reverse.

  3. David says:

    Hi Kelvin

    I see that you are using the MACD line at the points where the PA highs occurred.

    I have seen some sites and spoken to other traders who insist that you should use the height of the Histogram where the PA highs or lows occur when looking for Bullish or Bearish divergence.

    Please can you advise which is the correct method and why.

    Many Thanks

    David

    • Kelvin says:

      Hi David

      Are you referring to the Histogram divergence, it is also another possible way of trading divergence using MACD. Personally I prefer divergence that is formed by the MACD and its trigger line but that is just my own preference and it does not means that it is better than the histogram divergence.

      • David says:

        Hi Kelvin

        It’s clear to me there is quite a lot of confusion amongst traders so I think this is a very relevant point to clear up.

        After lots of investigation it appears the accepted method is to compare the level of the MACD line itself at HH and LL points.

        On the default MT4 indicator this would be equivalent to comparing the Histogram height at those points.

        However I have seen some charts posted by traders where they are comparing Histogram heights at HH and LL from the Histogram formed by the distance between the MACD and Trigger line which is what you I think you were suggesting you used.

        So this is the big question.Where looking at divergence patterns with the normal MACD Histogram you are effectively comparing the distance between the EMAs at HH and LL points.So when making a HH you might normally find the distance between the EMA to be wider at the HH than the LH.

        With the MACD/Trigger line histogram I’m not sure what we are actually comparing at a HH.

        It would be great if you could elaborate on this as from what I’ve seen there are a lot of traders who aren’t really sure what they are doing when they are looking at MACD divergence.

        Apologies for the essay !

        Regards

        David

        • Kelvin says:

          Hi David

          Thks for bringing up this point.

          In fact, for my method, the histogram does not serve any purpose in this divergence. For negative divergence, I simply look for the HH (Higher High) and HL (Higher Low) of the MACD line and its trigger line and then LH (Lower High) and HH (Higher High) of the chart. As for the positive divergence, I just look for LL (Lower Low) and HL (Higher Low) of the MACD line and its trigger line and then HL (Higher Low) and LL (Lower Low) of the price itself.

          I hope that I have answered your question.

  4. patricia says:

    Hi Kelvin

    Find yr explanation on MACD very useful n clear. Thing is how do I get the
    same MACD indicator as the ones u suggest? The default MACD in the MT4 trade only has one line – signal line. so how do I get the same version as yours?
    Wld appreciate yr response. I find many other technical analysts use the same one the u show here.

    • Kelvin says:

      Hi Patricia

      I am unable to help you in this area as I am not using MT4 platform. Maybe you can ask your provider for more information.

      You can try out other broker platform to see if their MACD is the same as mine. I am unable to give you a recommendation on the platform to use as I do not want to endorse any broker.

  5. stuart says:

    these tips on using indicators are interesting on the mac ,the negative divergance line drawn above the candles and the line drawn above the divergence look interesting these tips i feel need following up ,on my trading which are still in the novice stage.

    • Kelvin says:

      Hi Stuart

      I am glad you like this information. I personally find the divergence very reliable and it is one of the many good signal to trade. Do spend sometime to practice this on your chart. Good Luck!

  6. beben says:

    hello,what setting macd that ur using, does it original setting or modify setting.

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