The MACD is a two-moving average oscillator that is unbounded. Its primary application is to find confirmation points for trends. Therefore, until we make it bounded, it is unlikely to be employed for mean reversion and contrarian trading. This article explains what the Normalized MACD (Moving Average Convergence Divergence) indicator is and how you can implement it within your forex trading strategy.
What is the Normalized MACD Indicator?
The Normalised MACD indicator is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD indicator is made up of the following technical indicators:
- Moving Average: a trend-following indicator that smooths out price data by creating a single line representing the average price over a set period of time.
- Convergence: the point at which two moving averages, a fast and a slow moving average, come together.
- Divergence: the point at which two moving averages, a fast and a slow moving average, move apart.
The MACD indicator works by calculating the difference between the fast and slow moving averages and plotting that difference as a line on a chart. When the MACD line crosses above the signal line, it is considered a bullish signal and suggests that the price of the security may be about to rise. Conversely, when the MACD line crosses below the signal line, it is considered a bearish signal and suggests that the price of the security may be about to fall.
Normalized MACD Strategy
The Normalized MACD trading strategy is a simple and effective way to trade with the MACD indicator:
- It involves normalizing the MACD line to better visualize the signals it generates.
- It uses the MACD histogram, which is the difference between the MACD line and the signal line, to confirm the strength of the signals.
- It also uses the MACD line’s slope to further confirm the strength of the signals.
- The MACD line crosses above the signal line.
- The MACD histogram is above zero.
- The MACD line’s slope is positive.
- When the MACD line falls below the signal line.
- If the MACD histogram dips below zero.
- If the slope of the MACD line is negative.
Normalized MACD Indicator Pros & Cons
The Normalized MACD can be a useful addition to a trader’s trading system. It can be incorporated with other indicators or used as part of a comprehensive strategy to enhance its effectiveness. By understanding the advantages and limitations of the Normalized MACD, traders can make informed decisions on how to best utilize it in their trading.
- It is easy to understand and implement.
- It generates clear and reliable buy and sell signals.
- It can be used with any time frame and any asset.
- It may produce false signals in range-bound markets.
- It may be prone to lagging behind the price action.
- It may not work well in low liquidity or high volatility conditions.
The Normalized MACD is a strong indicator that can be utilized to identify trends and generate buy and sell signals. It is straightforward and easy to implement, making it suitable for traders of all levels of experience. While it may generate false signals in certain market conditions, it can still be a valuable tool in a trader’s arsenal when used appropriately. By incorporating the Normalized MACD with other indicators or using it as part of a larger trading system, traders can increase their chances of success in the market.
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