MACD is an Oscillating indicator which indicates the change in momentum (inertia) of the trade from bullish to bearish and vice versa. MACD (indicator) can also show when traders cross borders of overbought and oversold which usually leads to reversal of trend direction of a currency pair
What is MACD indicator
MACD is based on a group of moving averages and the relationship between them. The standard MACD examine the tie between 12-period and 26-period exponential moving averages. In addition, MACD examines specific distance between these two moving averages. In case the 12-period moving average is over 26 -periods, then the line of MACD is in positive territory.
In the opposite case, MACD line will be in negative territory. MACD line is also accompanied by a signal line (Trigger line). This line is a 9-period exponential moving average of the MACD line.
Trading signals for MACD trading
MACD line generates trading signals when crossing the signal line above or below.
Signals to open position –. when the MACD crosses the signal line from bottom to top you can buy the currency pair.Tthis is a signal for increases in the price. And the opposite case when MACD crosses the signal line from top to bottom, you can sell a currency pair and this a signal to change the momentum of bullish to bearish.
Signals to close position –. when the MACD crosses the signal line again from bottom to top and you have bought the stock or the CFD beforehand , you can sell currency pair, as it signals for a change in momentum from bullish to bearish.
Advantages of MACD
- Help to identify potential changes in the momentum of price movements of the currency pair.
- Help to confirm the strength of the current trend
Disadvantages of MACD
- Far behind the market ( typical to most of the indicators0 because the data used for the calculation of MACD is historical and does not reflect what happens in the Future.
- You can generate false signals.