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Chapter 12, Part II. Moving Average Convergence Divergence - MACD Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 20, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Here is the name – Moving Averages Convergence Divergence!

    Application of MACD

    Trend identification

    As we’ve said, MACD has two MAs with different speed. As we already know the fast MA (with smaller period) will faster react on appearing of new trend and outstrip the slower MA in following to trend. Hence – fast MA will cross slower MA. Actually, the way of interpreting MACD is the same as simple MA crossing.

    When such crossover has happened and the fast MA starts to diverge from the slower one, it indicates that a new trend has appeared:

    Chart #2 60-min EUR/USD and MACD (12; 26; 9)

    On chart #2 you can see, that line crossing nicely point on starting bull trend, and on bear trend then. So, the crossing of the fast line (blue) of the slow line (red) from below and moving above – indicates that the trend has shifted to bullish. If the fast line crosses the slow line from above and moving below –the trend turns bearish.

    Also take a note, that when the lines cross – the histogram disappears. This happens, because the difference between the lines equal to zero at the moment of crossing – hence the value of the histogram is also zero. But after that, when the distance between lines starts to increase – the histogram becomes greater and this is a good indication of a solid trend.

    But, as with any tool MACD has its own bugs. I intentionally draw the rectangle on the chart. Does it remind you anything? Pay attention to signals that MACD generates during this rectangle and match them with price action…
    Pipruit: Well-well, looks like we have here whipsaw price action, do we? I can’t guarantee the financial result of trading here, but the fact that MACD is too slow in estimating fast and short-term trend shifts is obvious.​
    Commander in Pips: You’re rights. Since MACD has much common with simple moving averages – it has the common disadvantages with them as well. That’s why it tends to lag behind the price…
    Pipruit: I do imagine – MACD is not just a simple MA – this is a Moving Average of a Moving Average… So, there is no surprise that it has a lag…​
    Commander in Pips: But still, it is one of the most favored tools amongst the traders, including me. Personally I use only MACD for trend identification, but in a bit of an advanced manner. For now we will talk how to reduce the negative impact of MACD lagging to trend identification.
    Hamza Samiullah and fran alvarez like this.
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