Hi! This is Leah from Trading Mastermind and now we are going to talk about moving average convergence divergence or MACD. Will MACD is really a typographic display of two moving averages. Instead of showing the moving averages themselves it shows a different graphic indicator of the two moving averages or in simple terms whether they’re moving averages are spreading apart are coming close together. So, when they moving averages or when MACD cross it show the change in the direction of the price may have happen. So notices that appear in the price channel I have 9, 12 and 26 moving average and the 12 is the red line and the 26 is the blue line. Who will down here in indicator channel I have a MACD with a setting of 12, 26 into 9. So, the red line the MACD line and the blue line is the trigger line which is actually a 9 period of MACD itself. Will MACD is the difference between 12 and 26 periods EFE. So, if MACD crosses above zero line will this indicates that a 12 period crosses above the 26 and that’s what we called positive MACD. If MACD is positive in rising then the gap between the 12 period EMA and the 26 period EMA is widening so this indicates that the rate of change of the faster moving average is higher than the rate of change for this slower moving average.
In other word it is indicating that the bullish momentum is increasing. So, as the MACD is crossing down below to zero line we know that the 12 period cross below the 26 period and that’s what we called negative MACD. MACD is negative and declining further then the negative gap between the 12 period and the 26 period is expanding. Will down the momentum is accelerating indicating a bearish period of trading. So the momentum strengthening in the down wide trend, will down here is a histogram. It represents the difference between MACD and the nine periods EMA. If you notice if the histogram gets larger this indicates that how wide the distance is between the MACD and the 9 period EMA or the trigger line. So the histogram is positive when it's above the trigger and the histogram goes negative if MACD is below the trigger line or the 9 period EMA. MACD generates signals and one of that is the divergence so, MACD can either form a series of higher load or a second load that is higher than the previous low.
Will divergence has our probably the less common signal but are usually the most reliable. Will here is some example that can help us the equation of divergences. Will here in this chart you can see that the price is increasing by this line above the pricing here, but MACD as you can see was falling the picks and we’re getting lower will this means that there was a change and you really can see that there was really a change right here. Here is another divergence they can help us lot, here you notice from November 2007 through November 2008 market was down and from the November 2008 that’s when that the divergence starts forming. The price continue to go lower during the final wave of the strength, while the prices going lower MACD is going higher forming a clear example of divergence. Will this divergence signal that turn in price as since then price is never again back to this low. And this can occur also in any timeframe not just a daily timeframe. Even though moving averages are logging indicators, notice that MACD most faster than a moving average. In this example MACD also provided as a few good trading signals.
So here in this example, a MACD crosses its trigger line ahead of time in right here in the price channel, moving averages is crosses but here in MACD it already happens. So MACD most faster than a moving average and because of this MACD provided as trigger for good trading signals is because when MACD crosses zero that’s the same point where the twelve EMA crosses 26 and that’s the same point where convergence becomes an actual crossing of the moving average. You will notice that MACD crosses his trigger line before it happens. One of the primary benefits of MACD is that it interprets aspects of both momentum and trend in one indicator. As a trend following indicator, MACD will not be wrong for very long because it is not possible price to be going up without MACD crossing its trigger line and subsequently crossing the zero line. But what is the most useful about MACD is that it crosses its trigger line much sooner than moving averages just cross. The use of moving averages insures that the indicator will eventually follow the moment of the underlying security and by using exponential moving averages as opposed to simple moving average will some the log has been taken out. And as a momentum indicator MACD has the ability to per shadow moves in the underlying security.
And MACD divergences can be the key factor in predicting a trend changes. But MACD is not good for identifying over both and over sold levels. Even though it is possible to identify levels that history can be represent over both and over sold levels will MACD doesn’t have any upper or lower limits to bind its movement. So, MACD can continue to over extend be in historical extremes. As you can see there is a lot of benefits in drawbacks using MACD, will perhaps you will enjoy using it in your trading business or to find out what were best in Forex trading just go to www.forextradingseminar.com.
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