MACD – Moving Average Convergence Divergence
For setting the MACD is used three variables:
• The first variable is the period of the fast moving average
• The second variable is the period of slow moving average
• The third variable is the period of the moving average of the difference between fast and slow MA
If the parameters of the MACD is “12,26,9″ (these are default settings) here is how to understand this:
• 12 is the period of fast EMA
• 29 is the period of slow EMA
• 9 is the period of the signal MA, that is calculated Based on the histogram (vertical lines) of the MACD
Histogram simply shows the difference between fast and slow EMA. If you look at the chart above, you will see that, when the two lines diverge, the histogram becomes greater. This is called divergence, as the fast moving average is moving away from slow moving average.
When moving averages are closer to each other, the histogram decreases. This is called convergence, because the fast moving average is close to slow MA. Here’s how the indicator is received its name – Moving Average Convergence Divergence.
Since there are two moving averages with different periods, apparently fast MA will respond more quickly to the price of slow. When new trend start, the fast MA crosses the slow MA. When we see crossing and fast MA start to move away from slow MA, this often means that we have a new trend.
From the above chart we can see that the fast MA has crossed below the slow MA and correctly signaled for new downward trend. Note that at the moment of crossing of the two MA histogram temporarily disappears. This is because the difference between two moving averages at the intersection point is zero. When starts a downtrend and fast MA is far from slow MA, histogram increases. This indicates a strong trend.
MACD also has drawbacks. Moving averages, of course, lag behind the price. However, MACD are just an average of past prices. Guess that – MACD is moving averages of other moving averages, it lags a lot. However, the MACD is one of the favorite indicators of many Forex traders.