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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 is a lagging indicators and it shows the relationship between two moving averages of recent prices. Most technical indicators used in technical analysis are lagging. This means they are slow and they just tell you after the fact what just happened.

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.

There are many chart types and technical indicators used in the technical analysis. Technical analysis helps you to read your charts. This is the key to understanding the market behavior.

MACD is calculated by subtracting a slow exponential moving average (EMA) from a fast EMA. Signal line is calculated by the taking the EMA of MACD. The Histogram is the difference between the MACD and its signal line.

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

Crossovers: When MACD falls below the signal line from above, it is a bearish signal. It indicates the time to sell. Conversely, when MACD rises above the signal line from below, it is a bullish signal. It indicates that you should 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 exponential average pulls away from the longer moving exponential average. Suppose MACD expands dramatically. It is an indication that the currency is overbought/ oversold and may return to normal soon.

One thing should be very clear. All the above three cases are important and should not be overlooked. However, none of them are signals for a trade. For example, 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 you confirm MACD with other technical indicators, success is more likely. This is because of the fact that several things are happening in the currency markets at the same time. So you have to confirm your finding with other technical indicators. Each is attracting the same bulls and bears into the trade that you are planning to make.

MACD crossovers and dramatic rises are easy to spot. However, spotting MACD divergence takes a little practice.