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You'll know why I said that MACD taking the same formulation as MA. Let us see the origin of the lines mentioned above (MACD line, trigger line, Histogram, and center line):MACD line. By default formulation of MACD line is: XMA12 - XMA26 (the difference between XMA period 12 and 26). Because it's using XMA, the nature MACD also more like the nature of XMA (which is providing earlier signals than another MA).
Trigger line: Trigger line is the actual trigger (which is by default XMA9).
Center line: It is the zero line that separate the negative histogram with positive histogram.
Histogram. Formulations for the histogram are: MACD line - Trigger line. Used as overbought / oversold indicator. We'll discuss about this thing later.
Other question is can we use the period to XMA MACD line and the trigger line? Of course you can. And if you're already quite advanced, you can try to explore using a different period.
Why we have to fuss when the MACD is only a reduction of only XMA. Not so in reality. Through a simple formulation, MACD is in fact able to give information not only the trend is going to happen, but more than that.
MACD can be used to determine the momentum of trend changes that are weak or strong, it can also be used to identify overbought / oversold in the market that can trigger the transition trend.
MACD for changes Trend
This is the typical use of MA which is applied as the MACD line and the trigger line. Reading the transition of trend from Bullish to Bearish is the same as in the MA. The Line that is used to read it is MACD line and trigger line. Let's see more pictures below:
Exactly as the rules on reading MA, when the MACD line crossed from the bottom of trigger line then trend changes toward Bullish trend will occur. And also, when the MACD line crossed trigger line from the top, then there will be a change towards Bearish trend.
And what's the impact to the center line? Is the line crossing between MACD line and the trigger line will change trend? It will! MACD line and the trigger line crossed the center line is also the indication changes trend. But in this case is the change in long-term trend.
Perhaps the criteria about 'how long' here are quite relative. That is dependent on the type of the currency itself. Meaning that it may be 'long' for the GBP is about 3 months but in the EUR and AUD could be 2 months for example. So depending on the currency that we choose and do not forget about the time scale we used.
Overbought and Oversold on MACD
From simple formulation of the MACD, not only we can determine the trend in the long term or short term. There is one more purpose of the MACD, as overbought and oversold indicator. Although rarely used, it's good if we also know about them. You may like this as indicators to determine overbought and oversold areas.
Overbought situation is an indication that the market has been experiencing saturation in buying the currency concerned. If this happens then it's predicted that the price will be decreased. Vice versa, if there are oversold predicted, there will be an increase of price to the point of its resistance. Note the picture below:
Note when the histogram going up and stay above the center line (zero line) then prices tend to move up and vice versa when moving down the histogram and the negative area, the price also moved down.Under the center line (minus area) is a region called the oversold area, and over the center line (positive area) is overbought area. The decrease in prices occurred at the time when histogram (this is the purposes of histogram) leave the concerned area.
Next let's summarize the principle applies in the MACD indicator:
1. MACD line crossed from the bottom of trigger line : Switching toward Bullish trend
2. MACD line crossed from the top of the trigger line : Switching toward Bearish trend
3. MACD line and the trigger line is located above centerline (positive area) : Long Bullish trend
4. MACD line and the trigger line is located under centerline (negative area) : Long Bearish trend 5. Histogram positive / negative : condition overbought / Oversold
6. Positive divergence : Price will move up
7. Negative divergence : Price will move down
Yup, up here my explanation on the MACD indicator. We'll meet again in the next indicator.
