MACD or Moving Average Convergence Divergence is a technical analysis tool used to identify moving averages that indicate the formation of a new trend, whether Bullish or Bearish . And the core of us using this indicator is to determine the trend of a market because by being able to follow a trend, we can get an advantage.
Keep in mind that when using this MACD tool you will usually see three numbers in the MACD settings in the trading platform that is
- First is the number of periods used to calculate a fast moving average .
- Second is the number of periods used to calculate a slow moving average .
- Third is the number of bars used to calculate the moving average of the difference between a fast moving average and a slow moving one.
For example, if you see a number setting “12, 26, 9” then the following is an explanation.
- The number 12 represents the previous 12 moving average bars which are faster
- The number 26 represents the previous 26 moving average bars which are slower
- The number 9 represents the 9 moving average bars of the difference between two moving averages . Formed in a vertical line called a histogram (green line above).
How to trade using MACD
From the explanation above it can be seen that the moving average there are two types of fast moving average which of course will immediately react to price movements and moving averagesthat are slow to react to price movements.
When a new trend begins to emerge, a fast moving average will first react and later crossover with a slow moving average . And when a crossover occurs, it can be said that a new trend has been formed.
From the picture above it can be seen that the moving average is fast crossing with a slow one and the uptrend pattern starts to form. And it should be noted that when the two lines cross, the histogram will disappear for a moment.
Example of using MACD for trading EUR / USD
In the EUR / USD chart a 1 hour (60 minute) timeframe, a fast line (blue) crosses over a slow line (red) and a quick histogram disappears. This indication indicates a reversal of the downtrend that has been formed.
And then a reversal occurs which quickly forms an uptrend . If you open a long (buy) position after or when this crossover is formed, you can get at least 200 pips.
Although it looks powerful, there is a weakness when using the MACD indicator, namely the moving average is slower than the actual price movement, this is because the moving averageonly records the price history. And even so this tool is what is widely used by traders to predict a trend.
You can also combine with several other indicators such as RSI , Bollinger Band , Stochastic , or ADX to get maximum prediction results.