Last time, I’ve told you about the trend-following indicator. Today, it will be about the trend confirming indicator. Although the trend-following tool is a popular indicator, it shouldn’t be taken alone because you may experience a double loss.
You may buy at a high price and then sell short at a lower price just to get rid of the forex position. So as not to let this happen, you can match your trend-following tool with a trend-confirmation indicator.
When you use a trend-confirmation indicator, you have to bear in mind that you’re not looking for a buy or sell signal. You are simply checking if both the trend-following and trend-confirming tools agree with each other. If both indicators are bullish, it means that you can be confident about investing on a foreign currency pair for a longer period. If both are bearish, you can look at selling short your foreign currency pair.
MACD: A Useful and Popular Trend Confirmation Indicator
Developed by Gerald Appel, the Moving Average Convergence Divergence indicator has been around since the 1960s. It is very simple to use and can be your powerful tool in forex trading. MACD is used to easily spot any short-term momentum. A lot of forex traders wait for the short-term moving average to go over the long-term moving average. If this happens, it means that the price is rising faster and suggests that you buy a forex position. On the other hand, if the short-term moving average goes below the long-term moving average, it means the price is going downward and suggests that you sell a forex position.
If you’re into short-term forex trading, the MACD indicator can be used to your advantage. However, it can also cause you to lose double as you may buy a forex position at a high price and see it lose its value quickly which will later cause you to short sell. The MACD is also unable to compare various securities.