In forex trading, ability to find a trend means much, as the traders have more chances to make money when they make the right decision. While RSI oscillator is used to see the current trend in comparison the previous one, Moving Average Convergence Divergence (MACD) is used to indicate a new trend. MACD shows whether it is a bullish or bearish condition. The traders certainly need understand how to use MACD indicator effectively.
How to Use MACD Indicator Effectively: The Components
An MACD chart is popular among forex traders as it presents momentum and trend-following indicator, which is derived from moving averages. Actually, MACD chart is mostly used as an additional tool to help the traders filter trading decisions. The chart consists of three numbers:
Number of periods used to calculate faster-moving average
Number of periods used to calculate slower-moving average
Number of bars used to calculate moving average, which consists of the difference between the faster and the slower moving averages.
Knowing how to use MACD indicator effectively helps you much in analyzing price and using the chart for trading. The first two moving averages work in different speeds. As the name suggests, the faster moving average will be faster to respond to price movement, compared to the slower one.
How to Use MACD Indicator Effectively: How It Works
The two moving lines show whether a new trend has been formed or not and whether the trend is strong or weak. The faster line will react first to every price change. If the trend continues, the faster line will cross the slower one. This phenomenon is called crossover. It will eventually move away from the slower one, just indicating that a new trend has formed.
When the two indicator lines move away from each other, it means that the trend is stronger. A new momentum has come. However, you need to keep in mind that MACD indicator is juts a trend. There is no guarantee that it provides accurate information. You may need other indicators and information on how to use MACD indicator effectively before arriving at a conclusion.