The MACD indicator is quite widely used in Forex when trading on various currency pairs and time intervals. By itself, the indicator shows the difference between the two exponential moving averages, due to which it contains both a pulsed and a trend component.
In the classic, the MACD indicator on Forex shows the difference between exponential averages from periods of 12 and 26. However, for some currency pairs and when trading on longer timeframes, these values can be changed in order to maximally adapt their readings to the real market situation and make the right decisions.
Market entry signals
The MACD indicator is used primarily to determine the time to enter the market. It is considered that the excess of the signal line above the indicator histogram is a signal for opening a sell position, while the position of the line below the histogram is a buy.
It is very important to pay attention to situations where the histogram is compared with the zero line, and does not take a positive or negative value. This suggests that the value of the two exponential averages is now equal. It is impossible to say unequivocally that this situation is a clear signal of market reversal, but if you use other indicators, you can get more reliable data on the price reversal time.
It should be said that the indicator largely demonstrates the overbought and oversold conditions of the market. However, it should be borne in mind that the indicator has a number of shortcomings that should be taken into account when using it in trading systems. Namely:
– a lot of false signals when trading on short timeframes;
– Invalidity of signals when using too long time intervals for analysis;
– low level of exponency with high trend strength;
– too high risk when trading against the trend when using MACD.
In general, it should be said that MACD can be successfully used for efficient trading, but only in combination with other indicators in the composition of the trading system. Relying only on this indicator, given its shortcomings and the actual construction (with some delay regarding the price) – is extremely risky and can lead to the opening of late transactions or exit from the market at the wrong time!