In my previous post, I wrote about the MACD
indicator and what it as about.
In this post, I am going to share with you on how
you can trade forex using the MACD indicator
The MACD indicator comes with 2 moving averages
with different speed.
One is faster and the other one slower.
The faster moving average will react quickly to
price movement in the forex market while the slower moving average will react
at a slower pace.
Whenever there us a new trend, the faster moving
average will react in advance and with time, it will cross the slower moving
average.
When the faster crosses the slower moving average, ‘crossover’
occurs.
As the faster moving average starts to move away,
divergence occurs.
This is often used as an indication that a new
trend is developing.
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| Source: Babypips.com |
From the image above, you will be able to see the
blue line (faster moving average) crossed under the red line (slow moving
average).
Every time there is a cross between these 2 lines,
the histogram will disappear.
Or you can say that it turn to 0 value because
there is no difference between the 2 moving averages.
If the histogram get bigger, it means that the
trend is getting stronger because the fster moving average is moving away from
the slower moving average.
Let’s take a look at an example.
 |
| Source: babypips.com |
In this EUR/USD’s 1-hour chart, the fast line
crossed above the slow line while the histogram disappeared.
This means that an uptrend is about to occur.
From there, EUR/USD began to rise as it started a
new uptrend.
If you entered a buy trade at that moment, you
would have got a good profit, more than 200 pips.
However, the MACD comes with a drawdown and this
drawdown is its lag.
MACD indicators tent to lag behind the price
movement because it is based on average historical prices.
Nevertheless, the MACD indicator is still widely
used by many forex traders out there.
Most traders will combine MACD
with other indicators so that they can have several filter mechanism in their
trading method in order to get more accurate entries to the forex market.
Check Out my other posts here- My Justinnation
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