Moving Average Convergence Divergence (MACD)

MACD is a momentum indicator used to identify a new trend.  It is calculated using two moving averages; a 12 day exponential moving average (EMA) and a 26 day exponential moving average.  By using these two EMAs a MACD, a signal line and a MACD histogram is calculated in the following way.

MACD  = 12 day EMA  -  26 day EMA

Signal Line = 9 day EMA of MACD

MACD histogram = MACD  -  Signal line

The image below shows a chart of the last month with the MACD at the bottom.  The main indicator to look for is a crossover between the MACD line and the signal line.  Since these two lines are essentially different moving averages of different speeds, the faster moving average will react quicker than the slower and thus crossover the slower line when a change in trend occurs.  Since the MACD histogram is generated by subtracting one from the other when they do crossover and are at the same point the histogram reads zero.

This is a chart of last months (June 2011) EURUSD which we chose randomly.  Notice on the 4hour chart that the crossovers, which we have marked with green bars, line up quite well with new trends.  Also notice that there is some lag between the trend change and the crossover due to the fact that MACD uses past data to be generated.  MACD is a powerful tool and many traders use it as a major part of their trading strategy.

The standard MACD function in the MT4 trading account (demo or live) can be brought up in a number of ways.  The simplest is to click on Indicators in the Navigator window to the left which is open by Default, then double click on MACD.  The standard 12, 26, 9 MACD is already set however  for some reason the presentation is unusual in that they present the MACD line as a histogram, and ignore the standard MACD histogram altogether.  This still presents the crossovers however they are not as clear.

For a more conventional MACD graph, you can download and save this file. MACD adjustable

Copy the file to C:\(location of your Metatrader install)\ACM MT4\experts.

Open the file in Metaeditor (make sure to run as administrator in Vista or windows 7),

Click compile button at the top

This will generate a file with the same name with a ex4 extension.

Copy this file to the indicators folder  C:\(location of your Metatrader install)\ACM MT4\experts\indicators

Restart MT4

MACD adjustable will now be available in the custom indicators in the navigation window.

Next lesson - Bollinger Bands