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Interpreting The MACD Trading Signal
Education | 30 October 2013
By: Stuart McPhee
Articles (22) Profile

Trend-following momentum indicators – such as the moving average convergence-divergence (MACD) indicator — show the relationship between two moving averages. Although the construction of the MACD is rather simple, it is nonetheless quite powerful. Created by Gerald Appel in the 1970s, the MACD indicator is used to identify changes in the strength, direction, and duration of a trend.

The MACD is a single line which represents the difference between a short-term exponential moving average and a long-term exponential moving average. The most common combination is that of a 12-day period juxtaposed with a 26-day period. Therefore, whenever these two moving averages physically intersect on the chart, the MACD line will cross either side of the zero line.

Another line is plotted alongside the MACD for interpretation purposes and it is called the signal or trigger line. The signal line is often a nine-day period exponential moving average of the MACD. Both of these lines are then plotted on either side of zero. If the shorter-term moving average is above the longer-term moving average, the MACD will be above zero, and vice-versa.

As you will see in Chart 1, the MACD is plotted below the daily chart of the Singapore dollar (USD/SGD), and consists of the single line.

As it is a moving average, naturally, the signal line lags slightly behind the MACD.

The solid bars oscillating around the zero line are tracking the difference between the main MACD line and the signal line. When the MACD is above the signal line, these bars will be above zero on the positive side, and vice-versa when the MACD is below the signal line.

The MACD can be interpreted in a number of ways:

 When the MACD crosses above the slower signal line, this is a cue to buy (a ‘bullish’ signal). The opposite is also true: when the MACD falls below the signal line, it is a prompt to sell (a ‘bearish’ signal).
 When the currency price diverges (moves in the opposite direction) from the MACD, this warns that the current trend may be coming to an end.
 When the MACD crosses above the centre line (zero), this is a bullish signal; when the MACD falls below the centre line, it is a bearish signal.

Indicators are the result of mathematical calculations done on price data and are displayed on charts. Using indicators, it is possible to anticipate the direction of a price’s movement with a reasonable level of accuracy. Above all, it should be noted that no indicator is perfect and no single indicator will be right all of the time.

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Stuart has more than 16 years of trading experience under his belt and specialises in technical market analysis of major currency pairs. Apart from being the author of several bestselling trading books, with his most recently released book "Trading in a Nutshell", Stuart contributes to daily newletters and blogs. He also produces articles and videos on the how tos of technical tradings. For more information of Stuart, you can follow him on twitter @stuartmcphee or check him out on Google+.

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