Trading the forex markets as a beginner can be a daunting proposition, as it is difficult to determine the most efficient way to create a trading strategy. A strategy entails finding an impetus to enter a trade, monitoring that trade and having a trigger to exit your trade. The entry and risk management of your trades are key to finding a long-term trading strategy that will produce gains over time. Many new traders turn to momentum as it defines the trend of a currency pair, and provide you with an impetus to enter a trade.
Momentum is one of the most popular ways to trade the capital markets. Momentum describes the acceleration and deceleration of a security. Think about a train, slowing building speed down the tracks. Momentum is accelerating until the train reaches it top speed. Now imaging there was an indicator that you could use that told you when acceleration was reaching it maximum. Well there is, and it’s called the moving average convergence divergence index.
The MACD measures momentum, and describes when acceleration is reaching its potential, which will allow you to enter a trend when a security begins to accelerate either higher or lower. It also tells you momentum is beginning to decelerate.
The MACD measures momentum by evaluating the different between 2-exponetial moving averages. A moving average is an average where you calculate the average for a specific period and when you add another data point, you drop the earliest data points. For example, a 5-day moving average is calculated by averaging the last 5-days. On day six, the first day is dropped from the calculation of the average.
How the MACD is Calculated
The MACD is calculated by creating a signal line and an index line. The MACD index is the 12-day exponential moving average minus the 26-day moving average. The signal line of the MACD is the 9-day moving average of the signal line. A buy signal is created when the MACD index crosses above the signal line and a sell signal is generated when the MACD line crosses below the signal line.