MCAD Divergence Why It Is An Important Part In Forex Trading?

Published: 23rd September 2011
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Developed in the 18th century by Gerald Appel, the MCAD, or Moving Average Convergence/Divergence, is an appealing momentum indicator. This is basically used to warn about or foresee any expected reversals in the market trends.
The calculation revolves around the exponential moving averages. Between the values of the exponential moving averages for 12 day or 26 day, the MCAD calculates the difference. Note that the 12 day average is faster than the 26 day exponential moving average. Based on the chart displayed by the indicator by these calculations, the buy or sell decision of the businessmen is guided.
MCAD displays a histogram which is pleasantly easy to read and interpret if you internalize the following points.
The histogram would get bigger if the prices speed up.
If the prices are rising but the acceleration is getting down, the histogram would start contracting.
The same rule applies to the condition when prices are falling but in a reversed direction of course
The readings and interpretations based upon the divergence given by the indicator are not a very reliable way to go. It fails often times, in fact more frequently that it succeeds; the reason is that people fail to interpret it right.Prevent that from happening; here is how you read any divergence on the scale.
Divergence is basically characterized by a failure to conform to the apparent trend in the price speed. Divergence can be positive or negative. Here is how you differentiate:
Positive divergence if the MCAD indicator makes a higher low than the price low, the divergence is said to be positive.
Negative divergence when the price makes a higher high than the high displayed by the MACD indicator, the divergence that has occurred would be negative.
If you find this confusing, you can simply go for a software scanner to read the divergence. The software would identify divergence whenever it occurs. For example, red arrows on the chart displayed mean that negative divergence is occurring.
Why It Works?
The MACD indicator warns you if there will be any reversal in the market trends in near future. The momentum indicator works on and analyzes the speed with which the market prices have changed and are expected to change. With this information you can decide whether the time and position of the stock is suitable for selling or instead you should buy in this condition. This makes your business decisions easier to make as they would be based upon mathematical estimation and calculations.

Read more details about macd divergence and moving average convergence divergence macd.

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