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MACD Indicator

Big Idea: The moving average convergence divergence indicator focuses on the 12 and 26 day moving average looking for bearish or bullish signals in a particular market. You calculate it by subtracting the 12 period from the 26 period Exponential Moving Average. That line is then charted with the 9 day EMA. If the MACD crosses above or below the signal line, the trader can indicate when to buy or sell.


This chart shows the price of CADJPY on the top and the 14-4 Hour Period Relative Strength Index on the bottom. As you can see, there are several points where the chart hits above or below the purple area. Anything within that zone is the “normal level” of where price could be. The part in gray represents where price is overbought or oversold. When price dipped to 30 on that first blue line, CADJPY entered into a short term uptrend. When the price rose to 70, the pair came back down.
This tool is very helpful in buy-the-dip or short-the-top opportunities, but they are not always correct. You can also see that those two overbought areas on the chart marked above 70 twice, but price continued to rise. Just as any trading tool, RSI should be used to estimate potential entries. In this instance, it would have been better to buy the dips rather than shorting when the pair moved too high according to the 14-Period RSI tool.

Key Takeaways

-MACD indicator is a good indicator for spotting mean reversions or changes in direction

-Although it can be helpful, it does not always work when the signal line is crossed

-MACD is charting two lines where one is the difference between the 12 and 26 period moving average and the other is the 9 period moving average

Additional Resources

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There is a significant degree of risk involved in trading securities. With respect to foreign exchange trading, there is considerable risk exposure, including but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you can afford to take the high risk of losing your money.
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