Moving Average Convergence Divergence (MACD) is one of the most reliable and useful tool in the arsenal of a currency trader. MACD is a trend following momentum indicator or oscillator.

MACD shows the relationship between two moving averages of recent prices. It is a lagging indicator. Most technical indicators are lagging which means they are slow. They just tell you what just happened after the fact.

Technical analysis is based on the belief that all available information is immediately impounded into the prices and the past prices can be used to predict the future prices in the currency markets. Learning technical analysis is must for you if you want to succeed as a currency trader.

Many chart types are used in the technical analysis. Technical analysis helps you to read your charts and analyze the price action with technical indicators. Learning how to use technical indicators is the key to understanding the market behavior.

MACD is calculated by subtracting a slow exponential moving average (EMA) like 55 from a fast exponential moving average like 21. Signal line is calculated by the taking the EMA of MACD for a number of bars like 8. The Histogram is the difference between the MACD and its signal line. 55 and 21 are the number of periods that you use.

MACD is one of the most popular indicators used in currency trading. However, beware that MACD is often misunderstood and misused. Like any other technical indicator you should use it in conjunction with other technical indicators.

In case of Crossovers, when MACD falls below the signal line, it is a bearish signal. It indicates the time to sell. Conversely, when MACD rises above the signal line, it is a bullish signal. It indicates that it may be time to buy.

Divergence: Divergence takes place when the price diverges from MACD. Divergence indicates the likely end of the current trend. Negative Divergence is when both the price action line and the MACD line are diverging and the price action is rising and MACD is falling. Thats right! The lagging indicator that is supposed to follow the price is predicting future behavior of the prices in the market. It is an indication of the change in the currency trend.

Dramatic Expansion: Dramatic expansion occurs when the shorter moving average pulls away from the longer moving average. When MACD expands dramatically, it is an indication that the currency is overbought/ oversold and may return to normal soon.

You should make one thing very clear when you use a MACD. All the above three cases are important. They should not be overlooked by you as a currency trader. However, none of them alone are signals for entering or exiting a trade. MACD Divergence is tradable when confirmed by other indicators. If you simply start trading on MACD Divergence, it may not yield a profitable trade.

However, when confirmed by other technical indicators, success is more likely. This is because of the fact that several things are happening at the same time. Each is attracting the same bulls and bears into the trade that you are planning to make. So you have to confirm your finding with other technical indicators.

When you use MACD, crossovers and dramatic rises are usually easy to spot. Even novices can do that. However, spotting MACD divergence correctly comes after a little practice.