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This indicates that this momentum trend will continue until it shows signs of weakness. If the opposite happens and the bar gets shorter and shorter, you can say the price momentum is weaker. But the MACD indicator has another attribute that sets it apart from other indicators: divergence and convergence.
The easy way of understanding convergence and divergence is by referring to the price trend and the histogram. For example, the price swing high of the short-term trend is going higher and higher. This is what is called a divergence. On the other hand, if the price swing lows of the short-term trend are going lower and lower, but the troughs of the histogram are going higher and higher, then this is described as convergence.
The appearance of divergence and convergence may signal that a possible trend change is coming. Thus, you may want to take positions counter to the current short-term trend. Its oscillations are very effective for identifying potential trend reversals. However, it is quite difficult to assess reversals from overbought and oversold levels since the MACD oscillates on an open range, which means there is no hard level or marker which would qualify overbought or oversold markets.
The BB MACD Indicator was developed to address this and help traders identify potential reversals coming from overbought and oversold market conditions. This indicator is an oscillator which plots dots that oscillate around a midlevel which is zero. Positive dots indicate a bullish general trend direction, while negative dots indicate a bearish general trend direction. The color of the dots also indicates the direction of the momentum.
Lime dots indicate a bullish momentum and magenta dots indicate a bearish momentum. This indicator also plots a line above and below the dots which form a band-like structure which envelope the dots. The blue upper line represents the overbought area, while the red lower line represents the oversold area.
It then plots the MACD values as the oscillator dots. It also compares the value of the current dot with its preceding dot. It plots a lime dot if it has a higher value than the prior dot, and a magenta dot if it has a lower value compared to the prior dot.
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Trend direction could be based on the slope of the moving average, which is clearly indicated by the color of the line. Both indicators are displayed on the same window and could be used in conjunction with the other. The indicator also displays the outer bands of the Bollinger Band and is displayed symmetrically.
On its own, it cannot be used to identify trend direction, but could only provide information regarding volatility. This allows traders to identify whether the market is on a contraction phase or an expansion phase. Although the outer lines of the Bollinger Band could not be used to determine trend direction on its own, it could still be used to identify momentum, oversold and overbought market conditions, and mean reversals coming from overextended price conditions when used in conjunction with the MACD Line.
Overbought and oversold conditions could also be identified based on whether the MACD line is beyond the outer lines of the Bollinger Band. Mean Reversals on the other hand are conditions wherein the MACD line is hooking back towards the midline coming from an overbought or oversold condition.
The indicator is a mix of two indicators. This improves the ability to identify the strength of the trend. At the same time, it helps to estimate the price range, allowing you to adjust your trading strategy to be able to adapt. The indicator can be used on charts of any time frame.
It is suitable for new as well as experienced Forex traders. However, it would be beneficial to have a basic understanding of Bollinger bands. The exit and entry signals are arranged in a single indicator panel. The color change of the dots indicates that the signal is changing.
The color of the dots changes between Majenta and Lime. This color change can be a buying opportunity. Conversely, it is an indication of bearishness and can be sold. Many traders like to hold positions but take profits when there are signs of a shift.
It is critical for a trader to be able to do more than just identify trends. However, it is also important to distinguish between market segments that are trending and those that are not. Similarly it is also used to distinguish between trending and non-trending markets.
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