What is the MACD Oscillator? The MACD (Moving Average Convergence Divergence) is a dynamic momentum and trend tracking indicator that measures the difference between two exponential moving averages (EMA) of different lengths.

In general, the exponential moving averages used are those of 12 and 26 periods. The average of 12 periods is faster and sensitive to the price action in the short term, while the average of 26 periods has more lag and does not react so quickly to price movements.

To this technical oscillator is often added a signal line, which is the 9-day EMA of the MACD, in order to define opportune moments of purchase and sale. The third element in this oscillator is the zero line or center line, which has no upper or lower limit, and around which the MACD line and the signal line fluctuate.

The last component is a histogram of the difference between the MACD line and the signal line. Histogram values ​​are positive when the MACD line is located above the signal line, while they are negative when the opposite occurs.

The MACD chart is really simple and is obtained as follows:

MACD line = EMA (12 periods) – EMA (26 periods)

Signal Line   = EMA (9 periods) of the MACD line

Central Line = Line 0

MACD Histogram = MACD Line – Signal Line

Technical Analysis: How to use the MACD oscillator successfully in Forex trading?

What is the interpretation? 
When the MACD line crosses line 0, this indicates that the exponential moving averages have crossed. The crossing of the MACD over the center line and towards the positive region indicates that the EMA-12 is superior to that of EMA-26. An increase in the MACD positive value points to a strengthening of the bullish momentum. On the other hand, a crossing of the MACD down the center line and in negative territory indicates that the EMA-12 is lower than the EMA-26. An increase in the MACD’s negative value points to a strengthening of the bearish momentum.

The graph below shows 5 different occasions when the MACD line crosses the centerline. In case 1, 3, 5, when the MACD line crosses to the negative side, the EMA-12 <EMA-26. In case 2 and 4, when the MACD line crosses to the positive side, the EMA-12> EMA-26.

Technical Analysis: How to use the MACD oscillator successfully in Forex trading?

When the MACD line crosses up the signal line, the price action is ascending, and the market is bullish. This situation is interpreted as a buy signal (Bullish Crossing). As long as the MACD line is above its moving average, the position will remain a buyer.

When the MACD line crosses below the signal line, the market is said to be bearish, and triggers a sell signal (bearish cross). As long as the MACD line was below its moving average, the position will continue to be a seller.

The graph below shows different buying and selling signals suggested by the crossings of the MACD line and the signal line.

Technical Analysis: How to use the MACD oscillator successfully in Forex trading?

This scenario suggests that the strength of the upward momentum of prices is losing vigor. A bearish crossing after this formation should be taken as a double signal of sale. The graph below represents this situation.

Technical Analysis: How to use the MACD oscillator successfully in Forex trading?

Positive Divergence: It takes place when the price action generates lower minimums, while the MACD line forms higher minimums. This occurrence indicates that the bearish momentum of the price action is weakening, so a bullish crossing after the appearance of this pattern offers a double buy signal.

Technical Analysis: How to use the MACD oscillator successfully in Forex trading?

It is worth noting that this oscillator is not infallible, and therefore on many occasions, it can provide us with false buy and sell signals, which ultimately end up being disadvantageous.

Therefore, before taking a long or short position, it is important to carry out a solid analysis, based on technical and fundamental aspects and understand the risks that currency trading entails.