For many beginners, forex trading in Singapore still finds it challenging to trade, especially with the odds stacked against them. Many often compare several technical indicators without understanding their importance and purpose. For instance, when choosing between MACD and Moving Average Convergence Divergence (MA), they would not know that both serve different purposes although they seem similar enough.
Oscillators such as MA & MACD is one of the most popular trading tools beginners use, making forex trading even more confusing for novice traders. It is recommended that beginner traders start using only a few indicators on their charts or avoid using any at all for an easier transition from concept to practice. Experienced traders also use oscillators but in a much more refined manner.
This article aims to explain how MACD and MA work in forex trading, what purpose they serve, and how they can be used together for tremendous success.
How does MA work?
MA works by taking the average of any currency pair’s price over a set period (typically 13 or 21). Once these averages are plotted on a chart, it is possible to see the general trend and direction of prices and a big jump up or down in prices after an uptrend or downtrend, respectively.
The longer the time frame, the stronger the signal generated because other factors such as volatility will have less time to affect its momentum. Price changes tend to follow trends, so instead of just monitoring price action, the momentum of those price changes is also essential for traders to see this reflected on a chart; it is necessary to plot two lines that cut through these average prices.
The first line plots the difference between two consecutive averages, while the second line smoothens out these differences by plotting a 9-day simple moving average (SMA) on top of it. When the first line cuts through above the second line or below it, a buy or sell signal is generated, indicating traders to enter/exit forex trading positions accordingly.
Nowadays, with all indicators being plotted onto a single chart, most software automatically generates these signals and prints them on their screen in real-time. Even if novice traders do not understand how to read a chart, they will still see the signals and know when it is time for them to trade.
MACD uses two exponential moving averages
In contrast with MA, MACD uses two exponential moving averages (EMAs) – one with a shorter timeframe and another with a more extended timeframe – instead of plotting average price over a set period. The first EMA represents the 12-day Exponential Moving Average (EMA), while the second line represents the 26-day EMA. Like MA, these two lines cut through each other to generate buy/sell signals, but there are subtle differences in how they perform their functions.
When prices rise after an uptrend, momentum increases, which means that prices will remain high despite volatility or sideways movements; conversely, once prices fall after a downtrend, momentum decreases, which means there will be periods of volatility sideways movements before prices continue falling.
To account for this situation, MACD plots two lines on top of the chart. One shorter and one longer – to anticipate these changes in momentum. The faster EMA represents the 12-day EMA. The slower EMA uses 26-days instead.
When both lines are moving up (or down), it shows that momentum is strong and prices are likely to continue rising (or falling), but when they cross each other to move in opposite directions, there might be some changes in future price movements. Traders can use this information to make better decisions regarding their trades and manage their risk accordingly.
Bottom line
Trading with MACD and MA generates better trading signals than using either of them on their own because it provides more information to anticipate future price movements, which an experienced trader can use to increase their chances of generating profits from trades.
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