MACD is the most popular technical indicator that is used by the majority of the traders and investor for determining market price in the Forex Trading. The application of this technical indicator is simple and it is easier to understand. It determines the trend characteristics with the help of two group of moving averages. Momentum is calculated by subtracting the greater moving average from the smaller moving average and the results are plotted that may be below or above zero. A MACD can be positive or negative. A positive MACD is indicated when the 12 days moving average trades higher than the 26 days moving average and a negative MACD is indicated when the 12 days moving average trades lower than the 26 days moving average.

A positive MACD signals that the price of the currency is going up so this trend is bullish. Positive MACD gives three types of signals. Bullish signals given by the positive MACD are explained below.

Positive Divergence

Advancing of MACD upwards when the price of the currency is still going in downtrend confirms that the trend is bullish. This is Positive Divergence. The trend is bullish in downtrend but yet the most effective and reliable. The trend is bullish because each low is higher than the previous trading session. This signal happens to be the least common among all the three bullish signals. For example, see the figure below that Price is going downwards till 16^th August but still MACD has advanced upwards.

Bullish Moving Average Crossover

It occurs most frequently whenever MACD goes above the trigger line or the 9 day EMA. These signals should not be the only reason of your trade because these are not very reliable and also the weakest among all the three bullish signals. For example, see the figure below that MACD remains above the trigger line or 9 day EMA from 16^th to 18^th August.

Bullish Centre line Crossover

It happens whenever MACD goes above the zero value to the positive value from a minus value. Among the three bullish signals, this signal is less common than the Positive Divergence. This signal is considered as the confirmation signal. For example, see the figure that MACD was in the minus value on 10^th of August and then from 10^th to 18^th it remained in minus value that is below Zero and then from 16^th to 18^th of August MACD reached to the positive value from a negative value and this is a clear example of Bullish Centre Line Crossover.

A negative MACD shows the acceleration of the downward momentum and so gives a bearish signal. Bearish signals given by the negative MACD are also of three types. These signals are explained below.

Negative Divergence

It occurs if the price of the currency moves sideways or advances and MACD declines. This divergence can either result in a straight decline or a lower high. This signal happens to be the least common among all the three bearish signals but most effective and reliable one. For example, see in the figure below that from 8^th of Jun to 11^th of June price is rising but MACD is declining and this is Negative Divergence.

Bearish Moving Average Crossover

This signal is the most common among all the three signals and occurs whenever MACD goes below its 9 days EMA level. Traders and Investors should not depend on these signals only because sometimes these signals are false also. So traders and investors should study these signals with other signals using other technical indicators to avoid any big loss. For example, look at the figure below and you will see that the MACD goes below its 9 days EMA level on 10^th of May.

Bearish Centre line Crossover

Occurrence of this signal means that the MACD has moved below the Zero axis and reached into the negative territory. It clearly indicates that momentum has now moved to negative from positive and this result in the bearish trend. It can be used with other with bearish moving average crossover or negative divergence but it can also confirm the trend on its own. For example, look at the figure below and you will see that MACD has reached in the negative territory on 9^th of June for the first time.

MACD Indicator has four Rules of thumb that are beneficial to the traders and investors. These rules are explained below.

Traders should buy or sell whenever MACD goes above or below the 9 days EMA.

Traders should buy or sell whenever MACD goes above or below the Zero axis.

The fact that market is strong can be confirmed whenever the signal line is crossed by MACD.

The dramatic rising of MACD indicates that price of the currency is over extended and the market will return to the realistic levels from an overbought or oversold position.

Proper study of MACD will give the traders and investors good signals to open or close position. An example of MACD is shown in the figure below.

How to draw MACD

Open a chart for any currency pair. Click on the Insert menu, click on the Indicator, click on the Custom and then click on the MACD.

Insert -->Indicators -->Custom -->MACD

See the picture below to understand better.

After selecting the MACD as shown above, the MACD window opens as shown in the picture below.

Fill the values in this window as according to requirements and the MACD will be automatically drawn on your chart.

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