What is a MACD Indicator I Forex?

One of the most commonly used indicator in Forex trading is the MACD indicator.
MACD stands for Moving Average Convergence Divergence.


It is a tool that is used to indicate a new trend.
It can be a downtrend changing into an uptrend or and uptrend changing into a downtrend.
The change of the trend is the most sought after moment for Forex trader because it is where most money can be made.

This is what  chart with MACD loaded up looks like.  You will usually see three numbers that are used for its settings.

• The first is the number of periods that is used to calculate the faster moving average.
• The second is the number of periods that is used in the slower moving average.
• And the third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.

In this example, we have the “12, 26, 9″  set up. This  is usually the default setting for most charting packages.



How do we read the MACD?

This is how we do it:

• The 12 represents the previous 12 bars of the faster moving average.
• The 26 represents the previous 26 bars of the slower moving average.
• The 9 represents the previous 9 bars of the difference between the two moving averages. This is plotted by vertical lines called a histogram (the green lines in the chart above).

Most of the time, there is a misconception about the lines if the MACD.
You have to take note here that the 2 lines in the MACD are not moving averages.
The lines is actually the difference between the 2 moving averages.


Based on the example above, the moving averages between the 12 and 26-period is the faster moving average.
As for the slower moving average,  it is plot with the average of the MACD line. In this case, it would be the 9-period moving average.
What this means is that the 9 periods is which is the faster MACD line to plot it against the slower moving average.
This will smooth en the original line and provide traders with a clearer and more accurate line.



As for the histogram, it is telling us the difference between the fast and slow moving average.
As the moving averages separate at a larger scale, the histogram gets bigger.
This occurrence is known as ‘divergence’.
When divergence occurs, the faster moving average is moving away from the slower moving average
When the moving averages gets closer to one another, the histogram  will become smaller.


This is known as ‘convergence’ as the moving average is converging as the faster moving average is getting closer to the slower moving average.
So to speak, convergence is the opposite of divergence.


So this is how the name MACD came about (Moving Average Convergence Divergence).

happy trading,

Yours sincerely,




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