When it comes to Forex trade, moving average convergence divergence (MACD) is one of the useful indicator tools. The concept behind MACD is that it measures and calculates the divergence between the slower and faster exponential moving averages (EMA). The difference obtained is then smoothed and contrasted with the moving average. If the current smoothed average is lower than its moving average, then downtrend is confirmed.

On the other side, the uptrend is established if the current smoothed average is above the moving average. Perhaps MACD is the best indicator that helps Forex traders figure out the moving averages which indicate a new trend, whether bearish or bullish. In the MACD chart, there are three numbers used for its setting.

• The first one indicates the number of periods for calculating a faster-moving average
• The second indicates the number of periods for calculating a slower moving average
• The third one shows the number of bars used for calculating the difference between the two moving averages. For instance, the common MACD parameters you are 12, 26 and 9. The most charting software uses these parameters as there default setting and represents the following:
• 12 -previous bars of the faster MA • 26 –previous 26 bars of the slower MA
• 9 –the difference between the two MA for the previous 9 bars Trading using MACD In MACD we have two moving averages; the faster MA and slower MA.

The faster MA is usually quick to detect the price movement than the slower MA. When there is a new trend, the fast line crosses the slower one. When this happens, the first line starts to diverge from the slower on indicating that a new trend has been formed. From the histogram available in most charts, you will note when the two moving averages cross each other, the histogram temporarily disappears. This shows the difference between the two MA at this point is zero. As the downward or upward trends begin, the histogram gets bigger indicating a strong trend has been established.