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The MACD indicator is a popular and versatile tool used in forex and CFD trading to identify trends and changes in momentum. It consists of two exponential moving averages, the difference between which creates the MACD line, and a nine period moving average of the MACD line, known as the signal or trigger line. MACD is a lagging indicator, but understanding how it works can help traders to make better trading decisions.
Understanding MACD: A Guide to Forex and CFD Trading Indicator
Introduction: History and Basics of the MACD Indicator
The MACD or Moving Average Convergence Divergence is a well-known and widely used indicator in forex and CFD trading. Originally developed by Gerald Appel in the late 70s, it is used for spotting changes in strength, direction, momentum, and duration in stock prices. Since then, it has been adapted to work in all markets. In this article, we will discuss the basics of the MACD indicator, its functions, and how traders can apply it in their trades.
Lagging and Leading Indicators: Understanding the MACD Indicator
The MACD indicator falls under the group of lagging indicators, which means it helps traders identify trends that have already occurred or are just happening. This is in contrast to leading indicators, which tells traders that something might happen in the future. However, neither type is better or worse than the other – it simply depends on the trader’s strategy and preferences.
The Function of the MACD Indicator
The basic function of the MACD indicator is to discover new trends and identify the end of current trends. It does this by calculating the difference between an instrument’s 26-day or 26 period at 12 period exponential moving average. The 12-day EMA is faster than the 26-day EMA, and it gives more weight or importance to the more recent price movements. This is because the more recent prices are statistically more important than the prices from the last 19 periods.
Using EMAs and Moving Averages
Traders use EMAs because they give more importance to recent price movements, and they are a modified moving average. In comparison, a simple moving average adds all the closes for the last 20 periods and divides them by 20, giving each period an equal weight. Using more than one moving average helps traders get a better view of the data by taking into account different time frames. The longer the moving average or the more time frames used, the slower the change in the indicator will be.
Steps to Use the MACD Indicator
To use the MACD indicator, traders must first put an exponential moving average on their charts. They need to do this twice, adjusting one to a 12 period moving average and the other to a 26 period moving average. The difference between the shorter and longer period moving averages gives traders the MACD line, which is plotted on the bottom of the chart. Traders then calculate a 9 period moving average of the MACD line, which will be the signal or trigger line. Traders can now use these two lines to identify trends and trade accordingly.
Conclusion: Applying the MACD Indicator in Trades
The MACD indicator is a popular and helpful tool for traders looking to identify trends and the end of current trends. While it may seem daunting at first, understanding the math behind the indicator is crucial for traders to fully comprehend its uses and signals. By using EMAs and multiple moving averages, traders can get a clearer view of the data and make informed trades based on the MACD lines.
