Littlefish FX Analysts
Littlefish FX
The Moving Average Convergence/Divergence (MACD) is a strategy which utilises moving average lines, which are created by previous price trends. It was developed by Gerald Appel in the 1970’s and in 1986, Thomas Aspray added a further component to it (the histogram) to bring it its current state.
Why Use MACD?
The MACD strategy can be used to isolate various signals, but it is most reliable when it is used to follow trends, and gauge the momentum of the trend. This is when the strategy is at its most effective, and is most forgiving to beginners and less experiences traders.
It is comprised of three indicators; the MACD line, the MACD signal line, and a histogram. The zero-line, or centre line, can also be used to inform the trader about price action, but we’ll set this aside for now to minimise confusion. Below is a chart featuring all three indicators with their corresponding labels.
Understanding The Three Indicators
MACD LINE
The MACD line is calculated by taking the difference between the 12-period exponential moving average, and the 26-period exponential moving average (EMA). The EMA tracks the latest price trend. By taking the difference between two EMAs with different timeframes, the trader can detect trend fluctuations.
MACD SIGNAL LINE
The MACD signal line is a 9-period exponential moving average of the MACD line. The convergence and divergence between the two lines is an indication of the momentum in the price action, but crucially and most obviously, it is an indication of the price trend.
When the MACD line crosses above the signal line it is a bullish trend, and when the signal line crosses above the MACD it is bearish.
HISTOGRAM
The histogram is a visual representation of the difference between the MACD line and the MACD signal line. As mentioned above, the gap between the two lines is an indication of momentum, and the histogram clearly measures that momentum in bars. As momentum accelerates the trader is given an idea of the strength of the price action, and any forthcoming changes to the price as momentum decelerates.
The histogram is positive when the MACD line is above the signal line (bullish), and negative when the signal line is above the MACD line (bearish).
How To Trade With MACD
There are various ways to use this strategy, but we’ll only be going through two of them here. The first method is to initiate a position when one of the MACD lines crosses over the other, which represents a change in trend. The second is by using the centre line crossover method – more on this below.
MACD LINE CROSSOVER
This is one of the most widely used trading techniques, and it is pretty self explanatory. Whenever the MACD line crosses over the signal line (or vice versa), it signals the end of a trend, and the trader should consider buying or selling. This is shown on the graph below.
CENTRE LINE CROSSOVER
The centre line method ignores the MACD signal line, and focuses only on the MACD line and the centre line. Whenever the MACD line crosses over the centre line, it is used as an indicator to initiate a position – see below.
Recalling that the MACD line represents the difference between the 12-period EMA and the 26-period EMA on the price chart, whenever the MACD line touches the centre line (which represents zero in value) the 12-period EMA and 26-period EMA are equal and the difference is zero.
Notice that this intersection directly correlates with an intersection (or crossover) of the two EMAs (MACD lines) on the price chart.
As with any other trading technique, the MACD strategy comes with its risks as it is based on previous price action. And like most oscillator indicators, it can provide false signals where there are no long-term trends. That being said, it does provide very strong predictive value and when used correctly, can help to lock in some very significant gains.
All comments, charts and analysis on this website are purely provided to demonstrate our own personal thoughts and views of the market and should in no way be treated as recommendations or advice. Please do not trade based solely on any information provided within this site, always do your own analysis.
Editors’ Picks
EUR/USD hits two-day highs near 1.1820
EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY drops back below 157.00, as focus shifts to Japan snap election
USD/JPY is back in the red below 157.00 in the Asian session on Friday. The Japanese Yen recovers ground against the US Dollar amid some profit-taking ahead of Japan's snap general election on Sunday. The preliminary reading of the Michigan Consumer Sentiment Index report for February will be released later on Friday.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates Premium
The EUR/USD pair lost additional ground in the first week of February, settling at around 1.1820. The reversal lost momentum after the pair peaked at 1.2082 in January, its highest since mid-2021.
Gold: Volatility persists in commodity space Premium
After losing more than 8% to end the previous week, Gold (XAU/USD) remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000.
GBP/USD: Pound Sterling tests key support ahead of a big week Premium
The Pound Sterling (GBP) changed course against the US Dollar (USD), with GBP/USD giving up nearly 200 pips in a dramatic correction.
Bitcoin: The worst may be behind us
Bitcoin (BTC) price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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