What is the MACD Forex Indicator on MT4?

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Right through this guide, we will have a detailed discussion about the MACD forex indicator on MT4. One of the most widely used trading indicators is moving average convergence divergence (MACD). It was invented in 1979 by Gerald Appel.

The MACD is a popular trend indicator and momentum indicator used by traders worldwide for simplicity and flexibility.

Using the MACD histogram to trade divergence is popular, but using it for forecasting is debatable. Since past information only includes successful divergence signals, a divergence trade may not be as accurate as it appears in hindsight. The failed divergences will not appear in past chart data because they are no longer visible.

macd

Overview

A separate chart window displays the moving average (Exponential Moving Average, EMA) and volume histogram for the MACD 2 Line indicator.

A zero line appears on the indicator as well. Again, there is an overbought zone above the line and an oversold zone below it.

Moving averages are more likely to reverse downward if higher than zero. Conversely, it is more likely to reverse upwards if the EMA is below zero.

MACDLine is a member of the oscillator group by default. Therefore, the indicator is more useful when the global or smaller trends start changing.

If you’re trading swings, intraday or long-term, the indicator can be a useful addition to your system.

If you use the intraday, swing, and shorter periods of EMAs, you will have more entry points in your trading. Therefore, there will be a higher likelihood of opening profitable trades when short-term trends reverse.

You’ll get fewer entry points, but they will be more reliable if you hold your positions open in the medium and long run.

MACD2Line’s key features

MT4 comes pre-installed with the MACD indicator, which is the predecessor of the MACD2Line indicator. The MACD2Line indicator has the following advantages:

  • A moving average indicator starts by drawing two averages – the fast and slow EMAs. The fast and slow lines are both red and blue. When the fast line crosses towards the slow line, entry signals are put together.
  • Additionally, red and green colours are present in the histogram volumes. The volume colour should only influence the selling decision; only the buying decision should be considered green.
  • Traders of foreign currencies are adjusting to the position to profit from this strategy. The larger the position, the greater the potential gain the price will reverse.
  • This strategy applies to any size of the forex market (FX) position, and there is no need to worry about influencing price. The same spread of about 3-5 points is typical for transactions of up to 100,000 units and down to 1,000 units in the major pairs.
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The MACD gives what kind of information?

Mathematical computations tell different stories depending on which indicator is being used. For example, when the fast EMA is above the slow EMA, the MACD displays a positive value, whereas if the slow EMA is above the fast EMA, the MACD displays a negative value.

Mt4 has a zero baseline for the MACD. MACD is further from the zero line when above or below the zero line. This indicates price growth. The MACD, when it approaches zero, indicates weakness in the trend.

MACDs that remain above zero indicates a bullish trend, while those below zero indicate a bearish trend. More prevalent is the trend when the MACD stays above or below the zero line for a longer period.

The trader must average up as temporary price movements oppose them. In many trading books, such a strategy has been derisively called out as “adding to your losers” in many trading books. As a result, such an approach is typically not recommended.

In what way does MACD work?

Three components make up the MACD indicator: two moving averages and a histogram.

Despite their appearance, the indicator’s two lines add up into layering as exponential moving averages (EMAs), not simple moving averages (SMAs). Lines two and three form the MACD and signal lines, respectively!

Moving averages are ‘convergent’ when they move together and divergent when they move apart. Histograms show how the two lines differ.

The MACD indicator would be used to confirm an uptrend if it was trading above zero below zero.

Traders might enter a long position if the market price trended upwards, breaking key resistance levels and reaching higher highs and lower lows. Conversely, if the asset is a downtrend, as indicated by lows and highs below support levels, traders might take a short position!

The MACD formula

MACD Line: 12-day EMA – 26-day EMA

Signal Line: 9-day EMA of MACD Line

MACD Histogram: MACD Line – Signal Line

You can calculate MACD by taking a 12-day exponential moving average (EMA) value and subtracting it from the 26-day EMA (12-day EMA – 26-day EMA). Using this formula, you can calculate MACD.

Calculating the Signal line requires taking the MACD line’s historical value and dividing it by 9 (9-day EMA of MACD line). The signal line smooths out the MACD line’s daily ups and downs. You will then have the Signal line.

By subtracting the MACD line from the signal line for the indicator, you can obtain the histogram. The histogram is equal to the MACD line – Signal line.

MACD formula

Pros and cons of using MACD

Pros

  • As a trend and momentum indicator, MACD can be used.
  • The MACD crossover and divergence provide clear buy and sell signals.
  • To achieve more clarity, you can combine MACD with other technical methods.

Cons

  • False reversals can occur. Divergences of the MACD imply reversal signals but do not always portend significant reversals. For example, the trend may be on hold or moving sideways before continuing. As a result, MACD cannot predict every reversal.
  • In many cases, MACD does not give a reliable analysis of trends. It is also possible for trend-following signals to fail or deliver insignificant movements before a trend reversal.

The MACD indicator install process (step by step)

  1. Metatrader uses the MACD indicator as a standard. Most brokers offer this indicator. In addition to being available by default in MT4, this indicator is available even if you are not using MT4.
  2. Open the MT4 terminal. Select the ‘custom’ option under the ‘insert’ window. You will see a list of trading tools and indicators. Select ‘MACD’ from the list.
  3. The MACD indicator will pop up in a small box that shows some parameters when you click on it. The period of the indicator changes according to your trading style. We suggest you use the default parameters.

What are the three most common MACD trading strategies?

You can find opportunities in markets using a variety of MACD strategies. Among the most popular are:

  1. Crossovers
  2. Histogram reversals
  3. Zero crosses

1.   Crossovers

Like a stochastic oscillator, MACD lines and signal lines are utilised to provide buy and sell signals.

A buy signal is issued when the faster, shorter-term, reactive line crosses above the slower, slower line in crossover strategies. As a result, a crossing below the signal line signals a bearish sell signal. This is the MACD line in this case.

Due to the lagging nature of the crossover strategy, the position is opened after a subsequent movement occurs. When MACD signals are generated in weaker market trends, the price may be approaching a reversal point when the signal is generated.

The signal is then deemed false. As a result, price action confirmation strategies are often seen as more reliable than those not.

2.   Histogram reversals

MACD’s histogram shows the difference between the MACD and signal lines and is arguably the most valuable part. A rising histogram indicates that the markets are moving strongly in a particular direction, whereas a dropping histogram indicates that the markets are slowing down.

In other words, the two moving average lines are getting further apart as the bars on the histogram move away from zero.

As we exit the initial expansion phase, we will likely see a hump shape emerging – this is an early indication that the moving averages are tightening again, and a crossover is on the horizon.

Comparatively to the lagging crossover strategy discussed above, this is a leading strategy. Heiken-Ashi reversals are based on general market trends to place positions, which means they can be executed before the market movement occurs.

A MACD histogram is not a price itself but a derivative. This is the trading equivalent of combining apples and oranges. Unfortunately, many traders lose money with this setup because they enter a trade based on a MACD indicator signal but exit the trade based on price movement.

3.   Zero crosses

EMAs that cross the zero line constitute the zero-cross strategy. A MACD crossing from below indicates an emerging uptrend, while a crossing from above indicates an emerging downtrend.

There will typically be fewer signals because it is slower, translating into fewer false reversals. If the MACD crosses above the zero line, it’s time to buy. If it crosses below the zero line, it’s time to close out a long position.

The delay in this method makes it difficult for signals to be issued in choppy, fast markets. However, it can provide useful signals for reversing long sweeping moves in this case.

Understanding where to exit the market or place a stop is critical when using the zero-cross strategy! In this example, the market breaks several trendlines, which would have indicated a good time to exit the trade.

Trading can also be exited via a break under the prior swing low (uptrend) or even above the prior swing high (downtrend).

MACD crosses above the zero line

Can MACD be used at any time?

Using the MACD indicator is totally up to you, your trading plan, and personal preferences; there is no ‘best time.’ For some, using the MACD indicator is not a good idea since they don’t analyse prices technically or use a variety of other indicators instead.

Using MACD, on the other hand, depends on the strategy you plan to utilise. To receive the signals as rapidly as possible, you would need to closely monitor your MACD indicator if you chose a lagging strategy.

Thus, if you decide to use a leading strategy, like the histogram, you might not have to monitor your MACD as often as you would if you followed a step-by-step strategy.

Professional traders use momentum to generate strategies. A trend emerges when momentum accelerates, signalling traders that a trend has begun.

MACD is an indicator commonly used by traders in day trading and forex trading. A line chart is generated by comparing two exponential moving averages that show the difference between the two averages.

Related questions: FAQs

1.   What is the best MACD indicator?

In MACD, support and resistance areas are commonly used to determine when a trend may change. With candlestick chart patterns, such as the Doji, you can see technical significance on the charts using moving average convergence divergence.

2.   MACD: What does it show?

It shows how two moving averages of a security’s price are related. Moving average convergence divergence (MACD) is a momentum indicator that follows the trend.

3.   Is MACD a reliable indicator?

Despite its many strengths and ability to spot trend reversals, the MACD is imperfect, particularly sideways markets. Overbought and oversold signals are not as effective based on underlying price points in a pure volume oscillator.

4.   Can MACD be used for day trading?

MACD is an indicator commonly used by traders in day trading and forex trading. A line chart is generated by comparing two exponential moving averages that show the difference between the two averages.

5.   What are the signs of a MACD false signal?

When you look at the 12 and 26 EMA performance mathematically, you can see that if underlying trades are flat after a sustained upward move, the indicator will somehow reverse direction and will head toward zero. This is known to be a false signal.

Bottom line

Like life, trading is rarely black and white. Instead, traders agree on rules blindly, such as never adding to a loser, which can be successfully broken to achieve extraordinary profits.

However, a logical, systematic approach to violating these important money management rules must be established before capturing gains.

In the case of the MACD histogram, trading the indicator instead of the price offers a new way to trade an old idea: divergence. Applying this method to the FX market, which allows effortless scaling up of positions, makes this idea even more intriguing to day traders and position traders alike.

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