FX Charts: How To Use The MACD Indicator

The MACD or Moving Average Convergence Divergence indicator is one of the most popular tools on FX charts. It can be used either as an indicator in itself, or as a check when you are mainly relying on other tools.

The MACD chart measures faster and slower moving averages and whether they are getting closer together (converging) or farther apart (diverging).

When they are converging you will see the two lines on the chart approaching each other and the bars on the histogram at the bottom of the chart become smaller. This usually indicates that the current trend is coming to an end or has ended.

Of course the faster line reacts to a change in price movements more quickly than the slower line. So when a new trend forms, the faster line will get closer and finally cross the slower line. If it then separates or diverges from the slower line, this is often an indicator that a new trend has formed.

When the two lines cross, the bars of the histogram will be at zero and then cross their axis so that if they were below the axis before, they are now above it, and vice versa. If a strong new trend is forming, the bars will quickly lengthen in the new direction.

So this crossover could be used as a signal to place an order. You have a buy signal when the faster line crosses the slower line from below, and a sell signal when it crosses from above.

However, there are disadvantages to the MACD which make the crossover unreliable as a self standing signal. The main problem is that even the so-called fast line is significantly behind actual prices because it measures averages of the past prices. So when the market is very volatile, trends could be ending before the MACD crossover marks that they have begun.

Generally the MACD is a better indicator of the strength of a trend than it is of its direction. For this reason some traders ignore the crossover and look instead at the length of the histogram bars. However it is not a good idea to enter a trade on the basis of this histogram (measuring divergence) and then leave it as soon as the price goes against you.

So if you decide to trade the MACD, you should probably use it for both your entry and exit signals. This takes a lot of nerve and experience, and it is not recommended for beginner forex traders. So if you are just starting out, you are probably better advised to base your trading decisions on other indicators on FX charts and refer to the MACD only for background.