convergence and divergence

MACD is an acronym for moving average convergence and divergence.

This technical indicator is applied to trading charts and used to analyze momentum swings in financial markets. The MACD was developed in the late 1970's by Gerald Appel.

Who is Gerald Appel you may ask ?

Aside from being the inventor of the Moving Average Convergence Divergence momentum technical trend trading indicator Gerald Appel is involved in financial assets management and offers his services via the Internet at a website called Signalert Corporation. Appel is the president of this business which he founded in the early seventies and which has grown into a multi million dollar investment management service. Appel is also President and CEO of Appel Assets Management and writes about investment strategies that focus on risk management. But Gerald Appel is more than a financial guru. He also trained in social sciences and claims that his psychotherapy training allows him to better understand his clients need.

In the same year that he founded Signalert Corporation (1973), Gerald Appel (born in 1947)began publishing a newsletter called Systems and Forecasts.

The MACD or convergence and divergence momentum or trend indicator is a simple technical indicator which is part of most online trading platforms available to traders on the internet today.

The MACD uses three values to evaluate deviation from the market mean of moving average.

The first setting is a long moving average, the second is a short moving average, and the third is a trade signal indicator.

The graph itself only shows two lines and usually an histogram.

One line is drawn by subtracting the short moving average from the long moving average. The other line is the signal moving average.

The histogram is calculated by subtracting the MACD signal line from the MACD itself.

A trader looks for crosses of the signal line and the MACD line. This occurs after divergence away from the mean or a convergence on the moving averages of the MACD.

The default settings used on most trading platforms is usually 26 for the long moving average, 12 for the short moving average, and 9 for the signal line.

However the trading platform end user can change the defaults and come up with combination that work well for the trading instrument which they are analyzing.

Like other momentum or trend technical indicators the MACD convergence and divergence indicator is not without it's limits. This indicator fails miserably in channels where breakouts fail to be followed through with a strong trend.

Look up some posts on this blog to see how the MACD is used to spot trading opportunities.

conclusion of gbpjpy 1 minute trade

On our last post the minute chart was showing early signs of yen strength.

Within a few hours we got out 134 price which put us in a trade short the sterling on the one minute chart which gave us more pips than we lost on the previous failure of the 30 second chart setup.

Gaining more on winning trades and losing less on losing trades is half the story of success in trading and in gambling.

The exit for the conclusion of the gpbjpy 1 minute trade came when the momentum was lost which was indicated when the price touched the 200 SMA.

The last four post show a method of intraday trading which is very time consuming. However the same divergence and convergence applies on longer timeframes.

The difference when trading longer timeframes is only the number of pips that you are placing odds against. The benefit of trading longer timeframes is that it frees up time to do other things with your valuable time. Things like working or concentrating on family and friends.

It's a matter of choice and of knowing what type of trader you are or want to be.


___________________

Trading includes risk. We provide this journal as an educational tool and not as trade information.

Sterling Yen 1 minute set up

Our 30 second test failed has seen here.

On the last post we said we'd wait to see the 1 minute MACD consolidate and at approximately noon on the same day it has.

The gpbjpy chart above shows the early stage of this set up. The 30 second chart failure saw the sterling buyers move the quote of the gbpjpy to 134.50 and on the 5 second chart shown above we watched a trendy retrace to 133. 60.

This retrace gave us a touch of the 200 SMA on the minute chart and a consolidation on our MACD.

What do we do with it ?

It noon and the gbpjpy is likely to hover at this level for many hours or even until the overnight markets start trading heavy.

We watch the five second chart for a chance to enter a trade short the pound around 134 or so and set another stoploss order about the last high.

gbpjpy 30 second failed trade

It only took less than an hour to see our 30 second chart set up fail. If a stop loss was set above the last high then this gpbjpy trade failed and a loss of about 40 pips was taken.

The 1 minute gbpjpy chart tells a story where the demand for gbp exceeded the supply and some traders were ready to push the sterling pound quote higher.

Where does it go next ?

We wait for consolidation on the one minute chart.

See the first post....gbpjpy 30 second test

See how the one minute chart setup worked out.

gbpjpy 30 second test

Following a gbpjpy 30 second test on June 1, 2010.

It's Tuesday morning and the US Memorial Long weekend has passed.

Today we are looking at the sterling pound of the UK and the Japanese Yen. Our MACD on the 30 second forex chart is showing some consolidation on the 30 second chart. Meanwhile the gbpjpy price is battling it out on the 200 SMA.

We could look to the 5 second chart for an entry short the UK pound here and put a stop loss or other risk protection strategy somewhere above the high of 1.33 and hold the position for a profit if the 30 second MACD signal works out.

How would we tell ?

Simple. Just look for a divergence pattern and exit at the end of the pattern. Easier said than done however.

See the results....gpbjpy 30 second test trade fails

_______________

This is a journal and only an educational exercise. We do not recommend trades and take no responsibility for other people failure to respect the risk warnings associated with trading foreign exchange currencies.