The MACD Indicator - Moving Average Convergence Divergence


MACD is a technical indicator that is used to generate buy-and-sell signals (alert), and to determine whether a security or index may be overbought (potentially expensive) or oversold (potentially cheap)

An indicator is just that it indicates an event. That event may be the continuation of a trend a breakout, a reversal, a top or bottom. Nothing is certain. Just at the very point a whole series of indicators predict a rally in a currency pair an event could take place which negates everything. The price changes and new indicators or signals arrive.

This is an example of the underlying and an indicator moving in the same direction. In this case, GBPUSD and the moving average convergence/divergence (MACD) indicator below:

 

Depending on the time interval, divergence can last for a long time. Therefore, observing the inconsistency between the price and an indicator should not be a final signal for traders. However it is the first signal that the current trend is weakening and may retrace in the near future.

In the example above, the divergence between GBPUSD and the MACD indicator on the Daily interval shows the downward trend has been started and the price began to decline. The discrepancy between the prices behavior and the indicator has been marked by green and blue lines on the chart.

The MACD is calculated as follows:

MACD Line = 12day EMA – 26day EMA
Signal Line = 9day EMA of MACD Line