Momentum in FOREX is similar to the momentum of a downhill skier, the fast the skier accelerates down a hill the farther they are likely to move. The same goes for FOREX momentum. One of the best indicators to use to measure momentum is the MACD – Moving Average Convergence Divergence Index. The MACD, created by Gerald Appel, measures the difference between two moving average, and compares the differential to a moving average of the differential.
The defaults for the MACD are the 12-day moving average and the 26-day moving average to create the spread. This difference is compared to the 9-day moving average of the spread. The MACD is a leading indicator, and generally catches the beginning of a trend. The risk is that during a consolidative period, the MACD generates many false signals during a choppy market environment.
The MACD crossover is one of the better signals an investor can use to find point when momentum is accelerating. When the MACD crosses above the 9-day moving average of the spread a buy signal is generated and when the MACD crosses below the 9-day moving average of the spread a sell signal is generated.
The MACD can be used on daily, weekly, monthly or intra-day data. The time horizons can be changed to capture the timeframe an investor is interest in. For example, short term daily can be changed to a spread that includes the 5 day moving average and the 13-day moving average with a 6-day moving average of the spread. Each tenor group should be evaluated to match a trader’s risk profile.