Gerard Apple designed an oscillator as a trend inciator plotted as a difference between two Moving Averages, which has several distinguishing features. It is called Moving Average Convergence Divergence. The authoer gave quite rigid parameters for the Exponential Moving Averages which lie as the base of this oscillator. Teh first part of MACD is the difference between two Exponential Moving Averages for 12 and 26 periods. It is drawn as a soldi line. We call this the fast line or the main line. The second part is an Exponential Moving Average of this difference for 9-periods. It is drawn as a dotted line on the chart. It is called the signal line.
Of course, we can experiment with the time period, the selection of the time period depends on the time scale of the price chart. Looking at the hourly chart, our indicator is based on the difference between two Exponential Moving Averages, but the time period of the slow Moving Average compared to price oscillator, is much smaller at 19. For the faster moving average, we have chosen 19. We want to trace the dynamics of the price change with the help of the MACD and by averaging the difference received will try and get trading signals to enter the market. The crossovers give the signals.
Look at those points, where the solid fast point crosses below the slow dotted line. That is a sell signal. If it crosses above the slow line, it is a signal to go long. When the baseline is above 0 and higher than the signal line, or when it is below 0 and lower than the signal line, we can assert that it is highly probable that the price is rising or falling. It is interesting to know how much of a chart would be shaded as reliable information. It may surprise you to learn that on daily charts of the major currency pairs, more than 60% of the time will be shaded, to give quite reliable information on the market direction. It is about 50% for hourly charts.
On a rising market, each oscillator, high may become a possible point of reversal. Immediately after such peaks, unshaded areas appear on the chart. They often predict a divergence. Only support lines and levels can confirm if the trend is over yet or not.. It is great to know in advance where the resistance level is, where the price will reverse from. Let’s see how MACD helps in a trading range. We use the borders of the range from the daily chart inside the hourly chart. Along with support and resistance lines, we include RSI and Stochastic.
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