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Moving Average Convergence Divergence indicator or MACD for short is amidst the most desired FX chart tools. It can be used either as an indicator in itself, or as a check when you are mainly dependant on other tools.

What the chart plots are the slower and faster moving averages and their approximate distance, whether they are moving separately (diverging) or coming together (converging).

Two lines moving towards each other as well as dwindling bars on the bottom histogram characterizes converging. This means that the present movement is either ceasing

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The faster line by default has a rapid reaction to price movements relative to the slower line. Hence, the slower line will be reached and eventually joined by the faster line. If it then breaks or diverges from the slower line, this is mostly an indicator that a new trend has started.

Upon their intersecting, bars on the histogram are on zero after which they reverse their axis advancing below if they were aloft, and above if they were below. Then if a new and strong trend casts, these bars would immediately build in the direction that was just set.

Therefore this crossover could be used as a sign to place an order. You have a buy signal when the faster line crosses the slower line from down below, and a sell signal when it crosses from above.

But all is not well with the MACD, with some problems rendering it imperfect to be the sole trading index. Since it surveys averages of historical prices, the fast line is indubitably moving well behind the current market prices. As a result, in a market characterized by uncertainty, the MACD could be just announcing the beginning of a trend that has already ended in actuality.

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The MACD is basically suited to signify trend strength rather than trend direction. Thus a number of traders would omit the crossover and concern themselves with assessing the length of the bars. That said, it is not recommended to use divergence as a signal to buy and to depart on the basis of an adverse price movement.

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In summary, other indicators on FX charts are normally better determinants of buy or sell decisions for newbie traders, reserving the MACD for general market analysis.

Note: Foreign Exchange trading is risky, may end up in considerable losses, and is not suitable for everyone.