How to Best Use the MACD in Forex Trading

Moving Average Convergence/Divergence (MACD) is known to be one of the simplest and most reliable indicators on Forex. MACD will let you locate bull divergences and bear divergences. Bull divergences and bear divergences are rare and effective patterns on Forex.

Bullish Divergence

A bullish divergence is occurring when the price reaches a new low, and MACD can't reach a new low. Bullish divergence basically shows that the downtrend is losing steam and an uptrend might be near.

For example, the price is at the same point as on the previous bottom and the MACD is in the same time at an higher point. After this so-called bullish divergence, EUR/USD will start an uptrend of more than 1200 pips.

Bearish Divergences

A bearish divergence is happening when the price reaches a new high, and MACD can't reach a new high. This will then show that the uptrend is losing steam and a downtrend might not be that far.

Like for an example, there is a certain new high on EUR/USD while MACD is at a lower level, and as a result the EUR/USD entered a nice downtrend that lasted for 2 months.

Confirmation Indicator

MACD can also be used as a confirmation indicator.

When MACD Histogram is above 0 this will only mean that we are in an uptrend. If MACD Histogram is below 0, it means that we're in a downtrend.

Using a cross above 0 or below 0 as a buy or sell signal respectively will work well during strong trends. However, in times when the market is choppy, this kind of technique will give you too much false signals. So, it is only recommended to use MACD histogram above 0 or below 0 for confirmation of other indicators buy and sell signals.

The downside of MACD is it tends to give you too many false signals during choppy markets. Thus, the best way to use MACD on any kind of market is for spotting divergences and confirming trades.

MACD is also not good in identifying overbought and oversold levels. Though, there is a possibility to identify levels that historically represent overbought and oversold levels, MACD doesn't have any upper or lower limits that would bind its movement. MACD is basically capable of overextending beyond historical extremes.