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The MACD indicator is just one of many popular indicators used in the forex market.
It is a trend following indicator consisting of two moving averages and it is calculated from the price action shown on the chart that it overlays.
The indicator is formed from three exponential moving averages a 12, 26 and 9 and is plotted as two moving averages.
The first moving average is formed by plotting the difference between the 12 and 26 exponential moving averages and is called the MACD line.
The second moving average is formed by plotting a 9 exponential moving average of the first plotted moving average and is called the signal line.
When the MACD line crosses up above the signal line this generates a possible buy trigger, and when the MACD line crosses below the signal line it generates a possible sell trigger. These signals should not be used in isolation but used to confirm other trading signals that qualify a trade.
It is worth noting that all signals generated from price based indicators such as MACD are lagging and price should be your number one confirming indicator when making a decision to take a trade.
On the below 15 minute chart of the EURUSD we can see the MACD line crosses above the signal line confirming a possible buy opportunity at point A. We can also see that price has traded down to an old support level adding a further reason why price may reverse giving an extra signal to take a trade.
Additional signals to take a trade could be that price has broken above a trendline and taken out an old resistance high confirming the start of a new uptrend.
When introducing an indicator into your trading system it is always prudent to test the signals it generates in a demo account over at least 20 trades so that you know the indicator is profitable.
Here is a free video lesson on how to use MACD.
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