Last week we looked at a couple of what I hope you found to be some interesting little gems in the MT4 indicator inventory; today I want to look at some things we can do with one of MT4’s most basic indicators, the MACD.
For the benefit of those of us new to Forex, MACD is an acronym for Moving Average Convergence Divergence oscillator, and is one of the most basic and common momentum indicators available. Developed in the late 1970s by Gerald Appel, the MACD turns two moving averages into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The intent is to provide dual benefits – trend following moving averages coupled with momentum. You can see what it looks like on the chart below:
This MACD indicator is set up for 12, 26 and 1 (very common settings for this indicator); I won’t go into much detail about the technical side of this indicator, but if you’re curious you can look it up on investopedia.com to learn more. The essential arithmetic for interpreting the MACD is when the MACD histogram is above the zero line (centerline), price action is going up and when it’s below, price action is going down. Pretty basic stuff; however, I’m going to add an interesting twist here (but before I do I just want to point out that this is a basic flavor MACD that comes with MT4 – there are others that use additional signal lines and such, which is beyond the scope of this article). Now, here’s the interesting twist – we can add another instance of the MACD indicator on top of the one we just put on the chart – see the chart below:
By “dragging” the indicator onto the pane of the first instance of the MACD indicator, the new instance will overlay on top of the old one, as opposed to opening a new pane. What’s so special about this technique? When we set the second (shown in red) indicator for 5, 15, 1 (that is, faster than the first instance) look what happens when the fast (red) MACD crosses the slow (blue) MACD. When the histogram bars are short, a fast cross below the zero line and a cross of the slow MACD to the downside is closely followed by the downward move in price action (see the area of the chart by the red arrow). More importantly, look closely at the next red line cross of the blue MACD: there is a cross to the upside several candles before price action makes a big move (look at the part of the chart indicated by the upward pointing green arrow). When the MACD cross occurs further away from the zero line, this will often give you a potential “early warning” of the a move to the upside or downside when followed by a “confirming” cross of the zero line. Pretty neat, huh? Notice that the zero lines do not line up with each other – this is typical with this layout and really doesn’t affect the analysis of the chart. And take a look at the chart below:
The green arrow on the lower pane shows a cross of the fast MACD above the slow MACD, followed quickly by the cross above the zero line; this can be very indicative of an imminent strong upward move. If we placed a long position at the MACD zero line cross (yellow arrow) we stood to make about 100 pips if we exited near the blue arrow at the top. Notice that during this period (the duration between the yellow and blue arrows), both MACD’s remained above the zero line, supporting strong bullish position.
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That’s all for now – next time I’m going to share with you some tips on drawing trendlines. Until then good luck in the market, and, as always, thanks for reading!