How does MACD indicator work?

Refer to Chart 1. The blue line at MACD indicator is the main line i.e. the difference between a 12 and 26 EMA and the red line is the trigger line.

If we take 26 EMA and imagine that it is a flat line, then the distance between this line and 12 EMA would represent the distance from MACD line to indicator's zero line.

The further MACD line goes from zero line, the wider is the gap between 12EMA and 26 EMA on the chart. The closer MACD moves to zero line, the closer are 12 and 26 EMA.

At vertical line 1, the MACD is negative i.e. below zero indicating 26 EMA (red) is above 12 EMA (blue) and with a high negative value indicating a large difference between the 12 and 26 EMA.

At vertical line 3, the MACD is positive indicating the 12 EMA is above 26 EMA and the MACD is further away from zero line indicating a large difference between 12 and 26 EMA.

When MACD (blue) cross over zero it indicate the 12 EMA has cross over the 26 EMA. Refer to vertical line 2 and 4.

MACD generates a bullish signal when it moves above its trigger line, and it sends a sell sign when it moves below its trigger line.

A crossover of the bar over zero level indicates a crossover of MACD over its trigger line. Refer to vertical line 5.

CHART 1

Confirmation of bullish signal is when the MACD crossover the zero level from negative position and vice versa for bearish confirmation with MACD moves below zero level from above.

MACD line (blue in chart 2) forms highs and lows. When we have an uptrend, they form higher highs and when we have a downtrend, they form lower highs and when the MACD line goes under the zero level, they form lower lows.

CHART 2

MACD Divergence:

MACD Divergence is one of the most famous and strongest trading signals that MACD generates. MACD Divergence forms when the price goes up and makes higher highs and at the same time, MACD bars go down and make lower highs.

The rule says, the price will finally follow the MACD direction and will break down. However, the problem is, you never know when the price will follow the MACD direction. So, if you rush and take a short position right when you see a MACD Divergence, it may keep on going up for several more candles. You should go short when MACD Divergence is followed by a good sell signal by the candles and/or a support break down. This is safer.

MACD Divergence can be seen at the end of uptrends. What does it mean? It means if you are a trend trader, you should not go long when you see that a MACD Divergence is formed. It can collapse at any time.

CHART 3: DIVERGENCE

MACD Convergence:

MACD Convergence is also a famous signal but people trust the MACD Divergence more because when the market goes down and collapses, it goes faster and stronger. Fear is stronger than greed and when market goes down, fear is the dominant emotion.

MACD Convergence forms when price goes down and forms lower highs or lower lows but at the same time MACD bars go up and form higher highs or higher lows. The rule says, the price will finally change the direction and will follow MACD which means it goes up. MACD Convergence can be seen at the end of downtrends. What does it mean? It means if you are a trend trader, you should not go short when you see that a MACD convergence is formed. It can jump up at any time.

CHART 4: MACD Convergence

What is MACD Definition?

MACD stands for Moving Average Convergence / Divergence. This indicator is developed in 1979 by Gerald Appeal, and is one of the most popular technical indicators.MACD is appreciated by traders the world over for its simplicity and flexibility because it can be used either as a trend or momentum indicator.

MACD is the difference of a 12 and a 26 exponential moving average(EMA).Of the two moving averages that make up MACD, the 12-day EMA, is obviously the faster one, while the 26-day is slower. In the calculation of their values, both moving averages use the closing prices of whatever period is measured. MACD subtracts the 26-period from the 12-period and the result will be displayed in a single line which is the MACD main line. Typical MACD indicators, have one extra line, which is a simple moving average of the main line. This exponential moving average is set to 9 by default and it acts as a trigger for buy and sell decisions. MACD generates a bullish signal when it moves above its own nine-day EMA, and it sends a sell sign when it moves below its nine-day EMA.

CHART 1

In MetaTrader, the default MACD doesn’t have the main MACD line(see the top indicator of chart 1). Instead, it has bars (histogram) representing the main line and a trigger line (the red line). It uses a 9 simple moving average(SMA) instead of EMA for the trigger line. This will not substantiially effect the effectiveness of MACD.

The standard MACD used by most current technicians has the two lines i.e. the main line (blue) and trigger line(dotted red line) with an addition of a historgram of the differece between the main line and the trigger line(MACD-H). (refer to the middle indicator of chart 1) .

Another version of MACD set the trigger line as 0 instead of 9. It has only a histogram of the difference between a 12 and a 26 EMA. In Meta Trader it is refer as Moving Average of Ossicilator(OsMA).(see the bottom indicator of chart 1).

I prefer to use the Standard MACD of the middle indicator of chart 1with coloured histogram.(see chart 2).

CHART 2

cable forming base at 1.4800

The British pound or Cable rose on Thursday after a stronger-than-expected headline reading of UK retail sales suggested the UK economy is slowly improving. Sterling climbed after British retail sales jumped 2.1 percent on the month in February, more than forecasts for a 0.7 percent rise. The rise was a temporary as by the end of the day the GBP/USD touch lower to 1.4800 as Investors clearly didn’t feel too strongly about Darling’s 2010 budget since the Cable was unable to break through any meaningful technical barriers. But by the end of the week, the cable managed to stabilize a bit and has avoided a retest of Thursday lows. The Cable is continuing to level out in the search for a new base. The currency pair is still trading well below key uptrend lines with numerous downtrend lines hanging overhead indicating momentum remains to the downside for the time being.

The data wire will be relatively quiet on Monday around the globe. The UK will print Net Lending to Individuals, though it is unlikely this release will garner noticeable attention. Hence, it appears psychological forces will be in the driver’s seat for the near-term, so investors should keep an eye on the news headlines for any further developments in the EU regarding fiscal situations.

Technically, on the one hour chart, the pair is inching upward with higher highs and higher lows. Any breakthrough of the downtrend A-B and the 89 EMA are expected to carry the pair toward the resistance at 1.5000-1.5020 level. Support is at 1.4800.

New pair-GBPUSD

When I first start trading forex, I trade USD/JPY since it has a low spread like EUR/USD and features smoother trends than other pairs. I trade during the Early Asian session and New York session. However, trading USDJPY was time consuming so I shift into trading EUR/JPY since I prefer to trade at afternoon Asian sesssion i.e. after 6:00 GMT. EUR/JPY is quite active during Asian and European session.

Starting next month I am going to trade GBP/USD since I am quite comfortable with my trading system.I like to trade GBP/USD because the spread is just moderate and the volatility is quite good.

GBP/USD pair likes large moves, it is able to bring more pips in one simple move than EUR/USD or USD/JPY. It is a pair often used for breakout trading. However, the risks here rise proportional to profit opportunities. GBP/USD requires further away placed stops. It belongs to

volatile pairs group. There is also plenty of market research and an alysis available for GBP/USD.

Finally, one other factor is my location and the time of the day when I am readily are available to trade i.e after 6:00 GMT to 14:00 GMT.

I intend to trade GBP/USD during early European session i.e. from 6:00 GMT-9 GMT. My profit target is still the same-50 pips per day. I will uitilised the same system mainly using the lag and trade breakout. Othe indicators I use is MACD, moving averages and pivot points.

EURJPY resistance at 125.00

The uncertainty about Greece is bugging the market, and until the issue is resolved, the market will be on the defensive. The doubts whether Greece would win euro-zone aid has pushed EURJPY on the downward path.

The EURJPY has twice unsuccessfully to penetrate 125.00 level. The second failure carried the pair passed the 80EMA, 200 EMA and 365 EMA. Currently the pair is resting at 50% retracement (122.43) and the trend line A1-A2. Initial bias for next week is a correction up to 38.2% retracement (123.09) as both lags are at the bottom and the MACD histogram reversing from the recent extreme low.

Any break of the support at 125.50 and the trend line A1-A2, the target drop is 61.8% retracement at 121.78.

The Greek Debt and The Euro-zone

As expected, the USDMYR went into a correction albeit a minor bounced from 3.300. This showed that the downtrend of the pair since early February is still intact. For the past three days the pair was bouncing above support at 3.2910 on the going saga of Greek debt and the European Union recation. It seems that Greece will saw a limited prospects for euro-zone assistance. The rhetoric of euro-zone finance ministers is just providing the ‘moral’ support to help calm markets and drive Greece’s borrowing costs lower.

The coming week, the Greek debt problem will exert some influence on the ringgit. Technically, the pair is being governed by the downtrending line A1-A2. At current juncture with blue lag at the top and red lag at bottom and MACD Histogram at zero level, the price direction is still undecided. Any breakthrough of the trendline price will meet the resistance of 3.3278. A decisive break of 3.2910 support will enhanced the downtrend line A1-A2.

Yuan and Ringgit Appreciation

President Obama has been putting pressure toward Beijing to allow the yuan to begin appreciating against the U.S. dollar within the next month and the currency trade more freely.

Pressure to end the yuan's de-facto peg to the U.S. dollar for the last 20 months will increase in the weeks leading up to the U.S. Treasury Department's currency report, due to be released April 15.

Speculation that Beijing may soon allow the yuan to rise has intensified since last weekend's comments by People's Bank of China Gov. Zhou Xiaochuan, which were interpreted as meaning the yuan's fixed rate against the dollar was a temporary response to the financial crisis and would soon be lifted.

So, what the appreciating yuan have to do with the ringgit. The ringgit have been seen to peg with yuan since the Malaysian economy and the Chinese economy is indirectly related. The current strength of the ringgit could partly due to the above speculation of the yuan. On the chart of USDMYR, the pair has been trending downwards past the last important horizontal support of 3.3272. The pair has been bouncing at 3.300 with technical indicator showing oversold position. A near term market correction is expected for USDMYR.

Currency repatriation

Japanese repatriation occurred during the months leading up to the fiscal half year-end in September and fiscal year-end in March. Repatriation is when Japanese companies bring back overseas earnings to book as profits. And those fund flows typically support the Japanese currency, as companies sell other currencies and buy yen.

UBS AG, the world’s second-largest currency trader, said in a recent report that tax breaks initiated by Japan last year to foster the nation’s economic recovery could lead to “larger than usual” repatriation of overseas earnings.

According to Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co. that this year Japanese companies may repatriate as much as 1.5 trillion yen ($16.7 billion) of overseas profit in March.

That was the main news that has been thrown about in every slight weakness in yen pairs. Looking at EURJPY chart, the pair has moved against the repatriation plays. It has showing strength since February 25 with price moving upward with higher high and higher low. Currently the pair is making an effort to break through the 125.00 level. This will be the second effort by the pair to penetrate the 125.00 since it break the level from above in early February.

Technically, the pair is currently overbought and I expected a correction at about 125.00. A deep correction with a small rebound will create a MACD divergence that will indicate a change in trend.

Yen weakness as risk appetite improve

Risk appetite was given a boost in the late session of the last day of the week on generally positive economic data. Consequently Japanese yen was sharply lower on improved risk appetite. There were additional pressure from speculation that BoJ might discuss more monetary easing measures in the coming meeting on March 15, which aims at lowering short term interest rates to fight against deflation. Also, LIBOR for three month yen loans dropped below dollar for the first time since August last year, which made yen the most attractively funding currency for carry trades than dollar.

The EURJPY broke through the resistance at 121.78 and rested at 61.8% retracement by the end of the week.

The EURJPY technically could be push up to touch the resistance at 124.51.

Bank Negara Malaysia raised the Overnight Policy Rate (OPR)

Bank Negara Malaysia raised the Overnight Policy Rate (OPR) by 25 basis this week has been expected by a number of economists who are now projecting a further rise in the OPR by year end.

The stronger economic growth for the fourth quarter last year provided the room for Bank Negara to normalize interest rates after cutting it to a historical low last year.

As expected, the ringgit also strengthened with USDMYR fall badly this week. Earlier in the week there is a dead cross of 200 EMA with 60 EMA and the price broke through the supporting bottom line of the triangle, it then penetrated the 61.8% retracement. The next support is at 3.3276 i.e. 100% retracement with prices expected to consolidate next week.

Tokyo Opening Price Support

As stated before, I used 5 MTF as reference for entry and exit but trade on 1 MTF.

Referring to the 5 MTF, a triangle on EURJPY formed after Tokyo open. At point 1, there is a breakout of the triangle for upside that was confirmed by MACD and lag. EURJPY met resistance at point 2 with round number 121.50, pivot mid-point and diagonal line. A trade opportunity for short at this point 2.

A price reaction with retest the triangle at declining resistance line, Tokyo opening price and 200 EMA. The Tokyo opening price has managed to support the price four time. Stop and reversed with potential for upside as the moving averages explode from the lateral movement.

My trades on 1 MTF are as follows

1. Enter short at point A that is consistence with point 2 on 5 MTF.

2. Stop and reversed at B that is consistence with point 3 on 5 MTF.

The lag and MACD are in line for entry and exit respectively.