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In the Forex market, one of the best tools that technical analysis has for trend identification is MACD indicator. Today, in this article, I will show you everything about this indicator. We will show you how the MACD indicator works and how to best use it in Forex trading.
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Contents hide
1What is the MACD indicator?
2How to use the MACD indicator in technical analysis
2.1Strategy 1. Trend prediction using MACD
2.2Strategy 2: Predicting the possibility of market reversal using MACD divergence
3How to effectively trade Forex using the MACD indicator
3.1Strategy 1. Trade Forex following the trend effectively with MACD indicator
3.2Strategy 2. Trade Forex using the MACD divergence
4Note when using the MACD indicator in Forex trading
What is the MACD indicator?
MACD stands for Moving Average Convergence Divergence. It was created by a technical analyst named Gerald Appel from the 1970s. MACD helps you figure out which trend the price is in. It also helps you identify when the trend ends, reverses, or creates a new one.
The MACD indicator consists of three main elements:
+ MACD (MACD line) – dark blue line: is the combination of the EMA12 – EMA26, which shows the price development trend.
+ Signal (Signal line) – orange line: is the EMA9, used to track the price trend.
+ Histogram column: is for measuring the degree of convergence/divergence between two moving averages. It shows whether the speed of price change at the given time is fast or slow.
How to use the MACD indicator in technical analysis
Strategy 1. Trend prediction using MACD
This is the convergence characteristic of the MACD indicator. It means that the direction of MACD is the direction of price.
(1) When the MACD line crosses the Signal line from below (the blue line intersects the orange line from the bottom) => The price is trending up. Histogram columns will point up.
(2) When the MACD line crosses the Signal line from above (the blue line intersects the orange line from the top) => The price is trending down. Histogram columns will head down.
Strategy 2: Predicting the possibility of market reversal using MACD divergence
Another characteristic of MACD is divergence. You need to identify the divergence of the MACD line. From there, you can forecast the possibility of price reversal.
MACD divergence has 2 basic types: MACD bullish divergence and MACD bearish divergence.
+ MACD bullish divergence appears when: The price is in a downtrend. Divergence appears between the price and the MACD indicator (The price decreases but the MACD increases). Soon after, the price reverses from bearish to bullish.
+ MACD bearish divergence appears when: The price is in an uptrend. Divergence appears between the price and the MACD indicator (The price increases but the MACD decreases). Soon after, the price reverses from bullish to bearish.
How to effectively trade Forex using the MACD indicator
In this section, I will guide you in detail on how to open a Forex order using the MACD indicator most simply and effectively. All entry points, stop-loss, and take-profit will be clearly described.
Notes: The following strategies to open an order should only be done with a Demo account. You can open a Free one by clicking on the button below. These are test transactions to get you familiar with as well as test the effectiveness of the MACD indicator. Absolutely do not apply it on a real account.
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Strategy 1. Trade Forex following the trend effectively with MACD indicator
Conditions: A 30-minute or 1-hour Japanese candlestick chart. The MACD (12,26,9) indicator.
Open a BUY order with MACD as follows:
+ Entry Point: Right after the MACD line crosses the Signal line from below and opens up. (The blue line crosses the red line from below).
+ Stop-Loss: At the lowest price level before rebounding.
+ Take-Profit: We take profit when the MACD line crosses the Signal line from above.
Open a SELL order with MACD as follows:
+ Entry Point: Right after the MACD line crosses the Signal line from above and opens up. (The blue line crosses the red line from above).
+ Stop-Loss: At the highest price level before falling back.
+ Take-Profit: We take profit when the MACD line crosses the Signal line from below.
Strategy 2. Trade Forex using the MACD divergence
With this trading strategy, the order’s accuracy is higher. However, you will need more time to open an order. This is because the MACD divergence rarely appears.
Conditions: A 30-minute or 1-hour Japanese candlestick chart. The MACD (12,26,9) indicator.
Open a BUY order when the MACD bullish divergence appears as follows:
+ Entry Point: When the MACD line and the Signal line widen and point up.
+ Stop-Loss: At the lowest price level before rebounding.
+ Take-Profit: We take profit when the MACD line crosses the Signal line from above.
Open a SELL order when the MACD bearish divergence appears as follows:
+ Entry Point: When the MACD line and the Signal line widen and head down.
+ Stop-Loss: At the highest price level before falling back.
+ Take-Profit: We take profit when the MACD line crosses the Signal line from below.
Note when using the MACD indicator in Forex trading
+ The MACD indicator is mainly used to determine a trend as well as a market trend reversal.
+ To search for entry points with the highest accuracy, you should combine MACD with 1 or 2 other indicators.
+ MACD gives the most accurate signal when used on price charts with long time frames. With short time frames, signals can be misleading.
MACD is a very good trading tool that is trusted by many veteran traders. Experience this indicator today to have one more basic Forex trading skill. Goodbye and see you again.
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