What is MACD?

The moving average convergence/divergence (also known as MACD) is a widely used indicator in the forex market. It has several applications some of which include:

• Measuring the strength of a currency pair
• Trend confirmation
• Indicator of reversals
• Indicator of currency pairs being either overbought or oversold

In order to calculate MACD you should estimate the difference between two exponential moving averages. It is recommended that you apply the 26-day and 12-day moving averages of a currency pair.

MACD Application on the Forex

As mentioned previously, the MACD has many applications, which are commonly used during volatile forex conditions.

Some traders apply the MACD in order to see for indications of crossovers. When the MACD crosses the signal line or zero, traders interpret this as a signal to sell or buy a currency pair.

The MACD is used by traders as an indicator of whether a particular currency pair is overbought or oversold. When the MACD increases, in which case the shorter moving average departs from the longer moving average significantly, the currency pair is expected to return to its realistic price levels, since it has reached its potential.

The MACD is also used to indicate trend reversals. This is observed when the currency price and the MACD move into different directions from one another. A bearish divergence is observed when the MACD hits a new low, which is not accompanied by the corresponding move of the currency pair. On the other hand, a bullish divergence is observed when the MACD hits a new high, which is not accompanied by the associated move of the currency pair. This may also indicate that the currency pair is overbought.

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