Investors can use the momentum strategy with the Moving Average Convergence/Divergence (MACD) whenever the market bursts out of a channel, possibly climbing over resistance or falling under support. This is typically a position transaction that might last multiple days or maybe even a month. Though most brokers charge a tiny overnight renewing fee to maintain the activeness of the trade, these transactions typically bring in as many pips to make keeping the position beneficial.
MACD is a prominent momentum indicator that performs well in markets with high volatility. Moving Average Convergence/Divergence (MACD) calculates 3 independent exponential moving averages and presents these as 2 intersecting lines of various colors above the chart or in the area underneath it. The MACD is represented by a single line, while the signal or trigger line is represented by another.
In the area underneath the currency pair’s price graph, the MACD additionally displays a histogram, which would be a type of bar chart. The MACD histogram has a line that signifies the zero point, known as the centerline, as well as the bars of its chart increase and decrease in the form of a wave above and below the centerline. The histogram depicts the gap seen between MACD & signal lines; once these intersect, the histogram reads zero.
If the software platform allows traders to configure the Moving Average Convergence/Divergence, the most common values for the indicators are 12 and 26 & 9 for the signal line. Investors should test to see what feels right for them and their trading style.
MACD, much like RSI, also shows whether a currency pairing is bought or sold above or under its value. There is also no exact figure to show this, however, whenever the lines of the histogram become extremely long, it is a solid indication that a reversal is imminent.
MACD, much like RSI, can also show divergence. Once the price makes a new peak or dip, yet the MACD line doesn’t, it may indicate that momentum is fading. Another reversal might be on the way.
Once the MACD passes its signal line, it represents an entrance signal in the directions of the MACD line. If it goes underneath the signal line, consider going short; if it climbs over it, consider going long. This signal is deemed as very powerful if the value of the currency pair goes over or underneath resistance immediately after the crossing; this might indicate a substantial move.
Because the MACD is a sluggish indicator, its signals will not predict the exact ups and downs for traders. Hence why it’s ineffective in a range-bound market: when the MACD gets to the existing price, the price might just have climbed or dropped so far inside the channel that there’s no more enough of a trade remaining to be worthwhile.
When traders are employing the Moving Average Convergence/Divergence in a momentum market, wherein the value has burst past support or resistance and is making new peaks or lows, the MACD signals might begin to diverge, suggesting that the trend is decreasing when it may not be. In these kinds of cases, keep an eye on the price chart and contrast what it is showing you to what the indicators are showing you.
Assume the GBP USD currency pair has broken out over resistance and is making new peaks. The MACD indicated the break by moving above its trigger line, however as the price rises, the MACD fails to hit new peaks, suggesting divergence and raising the question of whether the trend is deteriorating. And in the meantime, the price keeps growing.
Before traders decide to bail out, they must examine the chart. While the GBP USD pair rises, it will vary in short and medium-term patterns, falling briefly before climbing again. This is referred to as swing lows. This is quite normal.
Every subsequent swing low is bigger than the last. The market does not fall so far that the long-term trend alters; instead, it goes back down before resuming its ascent.
Traders must watch out for the pattern to shift. The bail-out point occurs when a swing low falls lower than the prior one. After they’ve closed their trade, it is time to sit back and assess the profits.
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