The reliability of the MACD divergence Forex signal lies in understanding what the indicator is, what it is used to detect, macd and determining the effective strategies associated with the indicator.
What is MACD?
The Moving Average Convergence/Divergence (MACD) is a technical indicator used to detect entry and exit points into the market. Investors use the indicator to determine a strong trend before establishing a position in the market.
Technically, the indicator is defined by the difference between a 26-period and 12-period exponential moving average. Some represent the resulting line as bars or a histogram depending on the investor’s preference. Some investors desire to view both on a chart. The simple moving average (SMA) is also displayed along with the MACD indicator. The SMA default is typically nine days for most investment tools.
How the MACD Works?
Most investors use a candlestick chart when applying this indicator. The indicator helps investors determine when a strong Forex signal has been established for entry or exit. This requires patience on behalf of the investor. Most MACD errors are related to the investor’s frustration of waiting for a strong signal. In their haste, Forex traders enter the market too soon and lose significant profits. Patient Forex traders will realize the gains that they are seeking.
No indicator is 100% reliable. This indicator is no exception to the rule. Forex traders must learn to hold their position until an optimal trade situation is presented. MACD is commonly used in Forex, because the delays are most indicative of how the Forex market behaves. If the market moves slightly in a 15 minute time period, an entry point cannot be established. However, if it moves significantly over the course of one to four hours or over the course of a day, then the investor should take note. Some experts advise waiting 3 days to ensure no false signals are produced. This increases the reliability of the indicator.
When a distinguishing candle pattern is recognized, this may be an indication the signal will change directions. For instance, many investors will enter the market when two candlesticks consistently touch the same high price in the market. This is called a “tweezer top” or a “divergence” point, and is a good entry or exit point depending on the trader’s strategy. If the next candlestick is a lower price, this may indicate a downward trend. However, the Forex signal could spike in the opposing direction and yield a “false signal.”
Forex traders should use MACD divergence Forex signal with other indicators to determine when a strong trading position has been established. Investors often use the indicator with the Relative Strength Index (RSI) to improve reliability and filter false signals. If used alone, the indicator is not 100% reliable, and the investor is more likely to make costly mistakes.