One of the most commonly used indicators is the Moving Average Convergence and Divergence (MACD). The MACD is an oscillating indicator.
In MACD, a currency is oversold if a low value is indicated and the currency is likely to reverse and start an uptrend. On the other hand, a currency is overbought when a consistent high value is indicates and this scenario, the currency will likely start a downtrend soon.
The MACD chart uses 3 exponential moving averages (EMA). The most commonly used combination of values for these 3 averages is (12, 26, 9). These three values create a 2-part indicator. The top part is the currency’s 12 day and a 26 day EMA. The 12 day is the faster moving average and the 26 day is the slower exponential moving average.
These 2 moving averages can be used to determine momentum of a currency. In our setup, when the 12-day EMA is above the 26-day EMA the currency is considered to be in an uptrend. The opposite is true for a downtrend with the 26-day being above the 12-day EMA. When 12-Day EMA goes faster than the 26-Day moving average, the uptrend becomes more pronounced and gets stronger. Once the 12-day EMA slows down and the 26-day EMA closes the gap between the two, that usually indicates that the uptrend is coming to an end.
The 9-day EMA is known as the histogram. The histogram shows the difference between the fast and the slow EMAs. In a chart, as the faster and slower EMA separate, the histogram gets bigger. This separation is called divergence because one of the moving averages is moving away or diverging from the other.
The MACD is a great indicator by many traders to help determine trends and changes in trend. However, MACD should never be used alone and should always be used in combination with additional indicators such as stochastics to help you confirm the start and end of trends as they develop. These indicators should work in harmony to help you determine whether to enter a trade.
In the world of trading, you must stack the odds of any trade you enter in your favor. To do this, you must use a strategy that uses a systematic approach. Each of your strategy’s components/indicators should complement the others providing your strategy with a double or even triple checking system. This approach will allow you to enter trades with a low risk and, but with large profit potential.
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