The MACD Indicator: Why Do You & Other Momentum Traders Like It So Much?

With the knowledge that you can use the MACD indicator, every momentum trader can take a breather. To you, it’s no secret that trading stocks in the foreign exchange market using short-term and long-term momentum can bury you in a load of stress. Regardless, you refuse to try your odds in another industry for one mere reason: you fancy all the rewards that come along.

The MACD & Its History

The MACD or Moving Average Convergence Divergence indicator is a momentum indicator developed by professional money manager, Gerald Appel, in 1979. Then, it was modified (with an additional histogram) by technical analyst, Thomas Aspray, in 1986. It features vertical bars that show differences with its lines.

Moreover, the MACD’s focus is on following trends and defining the deal between 2 moving averages. Instead of basing computations on percentages, it highlights actual prices. With it, you can calculate more accurate differences, which will then, help you determine basic and intermediate changes in stock prices.

It’s Time for Calculations
Calculating the MACD indicator isn’t simple; neither is it too challenging, however. You simply need practice in terms of getting accurate computation, as well as plotting the results on a histogram. 

The steps:
  1. Identify the 12-day exponential moving average. 
  2. From the 12-day exponential moving average, subtract the 26-day exponential moving average.
  3. Plot the results on the histogram and identify the MACD indicator.
Surefire Techniques of Using the MACD Indicator 
  • Be aware of a divergence. Whenever stock prices suddenly go off course, they’re indicating that the trend you’re following has come to an end. Insisting on heading a similar path can have setbacks since you’re not relying on any trend anymore. 
  • Keep your eye open for crossovers, which offer clues of either a bullish or a bearish market. If the MACD indicator goes above the signal line, it’s the right time for buyers to enter the forex market. Conversely, if the MACD indicator falls below the signal line, it implies that a selling condition is in place.
  • Observe for dramatic rises. In the event that the shorter moving average distances itself as far as possible from the longer moving average, you can tell that market conditions are reaching extreme levels. Particularly, it indicates overbought and oversold prices.
Can You Be Doomed with the MACD?
As much as you want to remain positive, you shouldn’t be blind to the fact that you can get in trouble with the MACD indicator. It’s a lagging indicator and like most technical analysis tools, it can generate faulty signals. 

For instance, it can suggest a false negative, which means that in spite of the absence of bullish crossovers, stock prices are still heading upward. However, granted you’re always equipped with a strategy, the indicator’s slight chances of screwing you over won’t have to be an irrevocable problem.

The Bottom Line
By using the MACD indicator, your job as a momentum trader becomes less difficult and even quite enjoyable. Other than trend-following, its application includes analyses with daily and weekly trades. 

The MACD is yet to be a perfect technical analysis tool. However, since it makes it unnecessary to cross your fingers every time you anticipate a trade to approach a certain direction, with it, you’re likely glad to be in the business.

Technical points have been shared by Mr. Steven, a Forex expert from MTrading India.