Trend Indicators: Moving Average Convergence Divergence (MACD) and OsMA

Moving Average Convergence Divergence (MACD)

Some of the disadvantages of moving averages may be avoided by using the Moving Average Convergence Divergence (MACD). MACD is the difference between the fast 12-day exponential moving average (fast EMA) and the slow 26-day exponential moving average (slow EMA). Typically, this is plotted with the 9-day EMA of the indicator itself.

SIGNAL = EMA(9) [MACD],

where

• MACD = EMA(12) [p] - EMA(26) [p];
• p – price.

Bullish divergence appears when a new price top has not been confirmed by a new MACD top, i.e. price top is above the preceding top and MACD top is below the preceding top:

This signifies that the prevailing trend is weak. However, it is not recommended to open positions against the weakening trend as it is valid up to the moment of reversal. Bullish divergence only indicates that the trend is weak, not that it has ceased. So, before you open a position against the trend, find more significant confirmations that the trend is about to reverse (for example, the breakout of the trend line).

Bearish convergence appears when a new price bottom has not been confirmed by a new bottom of the indicator, i.e. the following price bottom is below the preceding one, and the following indicator bottom is above the preceding one:

This means that the bearish trend is weak but this is not a signal for reversal, so find other confirmations before opening a position.

When the price changes a bit and MACD moves around the zero line, this signals trend continuation.

In order to add Moving Average Convergence Divergence (MACD) to the chart use the "Insert -> Indicators -> Oscillators -> MACD" menu sequence.

In MetaTrader 4 MACD is represented as a histogram (MACD) and a signal line (SIGNAL).

MACD signals:

• Levels which follow the signal line top or bottom are the alarms for a deal.
• If MACD is below the zero line then trend is bearish, if it is above it then the trend is bullish.
• SIGNAL line and price bullish divergence / bearish convergence – a strong sign that prevailing trend is weak.
• If MACD is below zero and there is no bearish convergence, and MACD histogram crosses the slow line (SIGNAL) from below, then there are great chances for an upside price rebound.
• If MACD is above zero and there is no bullish divergence and MACD histogram crosses the slow line (SIGNAL) from above, then there are great chances for a downside price rebound.

Moving Average of Oscillator (OsMA)

Moving Average of Oscillator (OsMA) is generally calculated as the difference between the oscillator and the moving average on the oscillator. In MetaTrader 4, MACD is used as an oscillator, and a SIGNAL (signal line) is used as a moving average:

OSMA = MACD-SIGNAL

Warning: This document does not constitute an offer or a recommendation to enter into any transaction. All views and statements expressed are believed to be true and accurate when published. Any person relying on this information to trade does so entirely at his/her own risk. The markets can be very volatile. Prices may move rapidly against you, and past performance is not necessarily a guide to future performance.