Are you confused about when to use MA or MACD? If yes, worry no more.
Reading this article should help you find out what lies in moving averages and moving average convergence divergence.
You will define, calculate and apply each of the most popular technical indicators. More importantly, you will compare them afterward for easier application.
Knowing it will help you choose the right tool for the suitable calculation and boost your forex trading profits. Let us start with Moving Averages.
Moving average is the most familiar technical indicator. Most technical oscillators and indicators derive their applications from MA.
The technical indicator is useful in helping you predict price direction. It gathers, groups, calculates, and analyzes past forex currency pair prices.
It takes two forms: Simple Moving Average (SMA) and Exponential Moving Average (EMA).
How to Calculate MA
Assume you want to determine the simple moving average for ten days. The formula to use is:
SMA = total prices for 10 days / 10
For example, the readings for USDCAD could be as follows:
1.2484, 1.25, 1.2576, 1.2490, 1.2490, 1.2492, 1.2558, 1.26, 1.2798, 1.29.
The total would be 1.2484 + 1.25 + 1.2576 + 1.2490 + 1.2490 + 1.2492 + 1.2558 + 1.26 + 1.2798 + 1.29 => 12.5888.
And the SMA is 12.5888/10 = 1.2589
Likewise, you can calculate EMA with the formula:
EMA = Closing price × multiplier + multiplier (previous day’s EMA)
The multiplier’s formula is 2 ÷ (number of observations + 1).
The moving average values help you determine the forex currency pair trend. A shorter-duration calculation is better at recognizing trends than a longer one.
Although both types are crucial in price change prediction, EMA is crucial for picturing the most current changes than SMA. SMA aligns all values with equal weight. MA readings enable you to draft, test, and apply market strategies.
Moving Average Convergence Divergence is a technical indicator composed of two moving averages. It converts the moving averages into momentum. How?
By subtracting the longer MA from the shorter one. The movement of the MA lines away from, towards, or across each other causes positive or negative fluctuations of the MACD line.
The typical MACD calculation durations are 9, 12, and 26 days. You can use them in the MACD formula to determine decision-making time.
Here is the MACD formula:
MACD Line = (12-day EMA – 26-day EMA)
Signal Line = 9-day EMA of MACD Line
MACD Histogram = MACD Line – Signal Line
First, gather the daily data of the period whose MACD you want to calculate. Second, find the exponential moving averages for the shorter and longer durations.
You may be wondering why you should use EMA instead of SMA in finding MACD. The reason is EMA gives a better picture of current prices than SMA.
What Do MACD Readings Imply?
The divergence of the 12-day EMA from the 26-day EMA leads to positive MACD and increasing momentum. On the other hand, decreasing momentum occurs when the 12-day EMA falls below the 26-day EMA.
The difference between the 26-day and 12-day EMAs represents the MACD line, whereas the difference between the MACD line and the 9-day EMA shows a histogram.
The exponential moving averages plotting works together with the indicator to represent the turning points and the signal line.
The rising of the MACD line above the signal line causes a positive histogram. Likewise, the falling MACD line below the signal line echoes a negative histogram.
The Relationship between MA and MACD
From the above calculations, you can realize that MACD derives its strength from MA. It uses exponential moving averages to find out the falling or rising momentums.
The moving averages tell you the trend (the price rise or falls). From the values, you can find the rate of change in the prices (momentum).
Moving averages and moving average convergence divergence are two of the most familiar technical indicators. Moving averages enable you to determine price trends. It subdivides into simple and exponential moving averages.
The converging of the exponential moving averages shows falling momentum. On the other hand, the divergence of the exponential moving averages symbolizes a rising momentum.