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MACD Indicator

How To Read MACD Correctly

MACD is an acronym of Moving Average Convergence Divergence. Macd consist of two lines and a histogram. The lines are MACD Line and Signal Line. See the chart below. For a clearer picture, click on the chart.

MACD Calculation

MACD default setting uses two exponential moving averages (EMA) in its calculation. The default setting is always (12, 26 ,9). These are moving averages. The MACD Line is the difference between the 12 and 26 period exponential moving averages or EMAS. The Signal Line is the 9 period EMA of the MACD line.

How I Read MACD Correctly In My Trading System

My forex trading system, uses the settings (40, 50 ,20). This helps filter out faults MACD cross over signals from the (12,26,9) settings. It helps you to stay in your trade and gives you the perfect place to get out of the trade. You will see how I combine this with the moving average indicator to catch good trades. Meanwhile, see chart below for a good trading example with my system using macd with setting (12,26,9) and (40,50,20)

MACD Histogram

The MACD Histogram is the difference between the two MACD Lines
(MACD line -MACD signal line)
The macd histogram charts most often appears on the same chart with the Macd Line and the Signal Line. If you look at the charts on this page, you will see Macd Histograms is made of vertical bars. This indicator is very interesting.

Trading MACD Histogram

How do I use Macd Histogram in my trading?

The vertical bars of Macd Histogram turn to be positive (drawn above the zero line), when Macd line is above the signal line and they turn to be negative (drawn below the zero line) when Macd line is below the signal line.

Macd Histogram is used as a momentum indicator in my trading system. Sharp increases in the Macd Histogram indicates upward momentum is picking up and sharp declines indicate downward momentum is increasing. When the histogram is above its zero line but starts to fall, the uptrend is weakening. When the histogram is below its zero line and starts to rise, the downtrend is losing momentum. These are early warnings that the current trend is losing momentum, and about to change direction. You can on the alert for your trade signals. I do not trade the signals generated by MACD Histogram. I use the signals to confirm my trade setup on my price chart. You will see how they all come together in my forex trading system.

MACD Histogram Signal

A bullish signal is generated when Macd Histogram turns from negative to positive at the close of a candle based on any time frame.A positive divergence occurs and Macd Histogram vertical bar is plotted above the zero line. I will then watch my chart. If a trading signal occurs on price bars,I will take the trade. If not, I will be on the alert.

A bearish signal is generated when Macd Histogram turns from positive to negative at the close of a candle based on your trading time frame. A negative divergence occurs and Macd Histogram vertical bar is plotted below the zero line. I will then watch my chart. If a trading signal occurs on price bars,I will take the trade. If not, I will be on the alert.

Are you still following? Great! Lets move forward.

MACD Conclusion

Many traders including myself rely strongly on MACD indicator because of MACD histogram. MACD histogram helps to measure momentum because it responds to the speed of price movement. Use MACD to measure the strength of the price movement and determine the direction of the trend. Be patient and let the market comes to your setup. Besides MACD, the other indicators I use in my trading system are Moving Averagesand Pivot Points. You have already read this topics. If not below is the link to both tutorial

Moving Averages

Pivot Points

You can now continue your forex trading tutorial with a lesson on Fx Charts. If you got here from search engine directly, then go to beginning of my Forex Trading Tutorial. You will gain much more by starting from the beginning and reading step by step.