How to Trade Using MACD
Forex Trading Floors “How to Trade” is covering MACD.
Because there are two moving averages with different "speeds", the faster one will obviously be quicker to react to price movement than the slower one.
When a new trend occurs, the fast line will react first and eventually cross the slower line. When this "crossover" occurs, and the fast line starts to "diverge" or move away from the slower line, it often indicates that a new trend has formed.
From the chart above, you can see that the fast line crossed under the slow line and correctly identified a new downtrend. Notice that when the lines crossed, the histogram temporarily disappears.
This is because the difference between the lines at the time of the cross is 0. As the downtrend begins and the fast line diverges away from the slow line, the histogram gets bigger, which is good indication of a strong trend.
Let's take a look at an example.
In EUR/USD's 1-hour chart above, the fast line crossed above the slow line while the histogram disappeared. This suggested that the brief downtrend would eventually reverse.
From then, EUR/USD began shooting up as it started a new uptrend. Imagine if you went long after the crossover, you would've gained almost 200 pips!
There is one drawback to MACD. Naturally, moving averages tend to lag behind price. After all, it's just an average of historical prices.
Since the MACD represents moving averages of other moving averages and is smoothed out by another moving average, you can imagine that there is quite a bit of lag. However, MACD is still one of the most favoured tools by many traders.
Next week on “How to Trade” Forex Trading Floors will cover 2. Divergence with Price.
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