The acronym MACD stands for Moving Average Convergence Divergence, and the oscillator is a default in any trading platform, including MT4. The MACD oscillator has stood the test of time as one of the most reliable technical indicators. Built in the 1970s by Gerald Apel, it shows the changes in direction and momentum of a stock price. Remember the currency market wasn’t available to retail Forex investors back then, but the principle is the same so the MACD works when trading Forex too.
MT4’s default elements are:
- Fast EMA (Exponential Moving Average): considers twelve periods
- Slow EMA: considers twenty-six periods
- SMA (9): Simple Moving Average that considers nine periods
Applied on a chart, it looks like this:
All oscillators appear in a separate window at the bottom of the main chart. Above is the EUR/USD daily timeframe, and the MACD shows only two elements:
- a histogram
- a red line
How to Trade with the MACD
The histogram is the most critical element of the MACD indicator. In fact, it shows the crosses between the two EMAs mentioned earlier. When the fast EMA crosses above the slower one, the MACD histogram turns positive. When it crosses below, it turns negative. As such, the zero level plays a significant role in the overall interpretation of the MACD oscillator.
Investors use the MACD both as a trending and a ranging indicator.
The easiest way to illustrate the use of the MACD is to look at an example. Above is the EUR/USD price action on a daily chart. It shows the pair breaking lower from around 1.25 in the second quarter of 2018. A bearish trend like this one is illustrated by the MACD histogram turning negative and remaining like this for as long as the trend continues. It shows a small bounce but then turns negative again. A bearish trend is defined by a series of lower highs; this also applies to the MACD. If you look at the bounce highlighted on the chart above, you’ll note that the histogram continued the series of lower highs. Therefore, the bounce is a false move as the bearish trend was supposed to continue, which it did.
Another way to trade with the MACD oscillator is to use divergences between the MACD histogram and the actual price. The EUR/USD shows one bearish divergence towards the current price levels, but if you look on the top left of the chart, another one exists. We’ll let you spot it using the same principles as the one highlighted here.
All in all, the MACD is an excellent oscillator showing both trending and ranging conditions. The fact that it has survived the test of time and is still used in the currency market today, means that it has become of great value to retail forex investors.
- The MACD shows both ranging and trending conditions.
- A series of lower highs or higher lows applies to the MACD.
- The MACD histogram shows powerful bullish or bearish divergences.
- MACD shows both positive and negative values, with the zero line dividing the two.