BASIC FOREX TRADING COURSE --- Lesson 6

MACD

MACD stands for "Moving Average Convergence/Divergence".

MACD is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. MACD is a centered oscillator and the guidelines for using centered oscillators apply.

You don't need to go into much detail. All you need to know is that MACD measures the difference between 2 Moving Averages. Below you will find a chart with 2 Moving Averages, (5 period close SMA and a 10 period High SMA) and MACD Indicator. Again you do not need to do any calculation, your charting package will provide you with this indicator.

In the above example you will see that whenever there is a crossover between two MACD lines, it gives you a Buy or a Sell Signal.

When the Blue MACD line crosses and goes below the red MACD line its a Sell Signal and when the Blue MACD line crosses and goes above the Red MACD line its a Buy Signal.

You will also see the Histogram. Histogram is the green straight lines on top or under a Red Central Line. The Red Central Line is the 0 line.

You will notice that green lines in the Histogram are of varying length. The lines show the strength of the price movements. As the market is going up or down, the green lines are increasing in length, they then reach a peak and the gradually start decreasing in length. This warns us well before hand to get ready to exit the Market. We wait for the confirmation from the Moving Averages and as soon as we get the signal, we exit with a Profit.

You can trade nicely using just these 2 Indicators but now we are going to Strengthen our Arsenal by adding a third indicator called RSI.

RSI Relative Strength Index

RSI identifies Overbought and Oversold conditions in the Market. It is scaled from 0 to 100. When the reading is below 30 it indicates that the Market is Oversold, and when reading is over 70 it indicates that the Market is Overbought. So what does it mean? It means that when the Market is Overbought the trend is about to change and its good time to Sell Short. And if the reading is below 30 the Market is Oversold, its a good time to Buy.

RSI also confirms the Trend Formation. First look at the chart below and then I will explain how to read and interpret the chart.

Look at the above chart very carefully. You are now already familiar with the Moving Averages and how we interpret their indications and signals. If you look at the lower part of the chart, you will find that the RSI has been plotted as a Green coloured line running up and down the Black Line. This Black line is the mid point (50) of the RSI . Both above and below the Mid Point you will see broken red lines at 70 and 30.

If there are equal number of Buyers and Sellers and they all were buying and selling at any one particular price contineously then we will see the Green RSI Line contineously running along the mid point of 50. But when there are more Sellers than Buyers the Green line will stay below the mid point of 50 and when the market gets Oversold then the RSI line drops below the 30 line and eventually the market has to come up to level off. This is the ideal time to buy.

You could also buy when you see the RSI line cutting and crossing the Mid Point of 50 from below and Sell when the RSI line cuts and crosses the Midpoint of 50 from above as shown in the above chart. These points are shown in Pink.

You have now completed your Basic Forex Trading Course

Next, I am going to give you a Forex Trading Strategy to Trade with.

Keep watching for your Next Lesson...