The Moving Average Convergence-Divergence (MACD) is a technical indicator that was originally constructed by Gerald Appel,  an analyst in New York.

It was  originally designed for analysis of stock trends, but is now widely used for technical analysis in many markets, like for instance the Forex market.

MACD is constructed by making an average of the difference between two moving averages. This difference of the original two moving averages and the moving average of the difference can be plotted as two lines, one fast and one slow.

Most modern charting software packages and some trading platforms like the MetaTrader nowadays  include   the MACD indicator as standard.

Once you select it to display,  it normally shows up as two lines plotted on an open scale against the zero line.

These two lines will normally be of different color or one line a solid line and the other a dotted line. Frequently used settings are 12 and 26 period exponential moving averages with 9 period exponential moving average as the signal line.

Even though there are three moving averages mentioned,  you will only see two lines. The simplest method to use the MACD is when the two lines cross:  If the faster signal line crosses above the slower line then a buy signal is generated and vice versa.

The MACD  is also used as an overbought and oversold indicator: The higher above the zero both lines are the more overbought the currency pair you look  at becomes. And the lower below the zero line both lines are the more oversold it becomes.  The signal is even stronger, if the lines cross down whenthe currency pair is overbought or cross up when it is oversold.

Another common use of MACD is that of spotting divergence, which may lead to an indication of a change in direction the currency pair you look at moves: If the MACD is making new lows and the price of the currency pair is not making new lows that is one form of divergence (bullish divergence).  If the MACD has made a high and starts to head down, but price continues up,  that is another type of divergence (bearish divergence).

Another good way to go about it is to use the MACD as a trend indicator (trend convergence). This way you can try to establish a trend in a higher time period than the one you  intend to trade. For instance: If you were trading daily charts you would be looking at the MACD on the weekly charts. If you were trading  hourly charts you might look at the MACD on the four hour or daily charts etc. As long as the signal line remains above or below the MACD line on the next higher time frame you know the trend is still in place.

Another basic index used in technical forex analysis is the Relative Strength Index (RSI).

The RSI was developed by J.Welles Wilder Jr. and introduced in his book ‘New Concepts In Technical Trading Systems’.  It is one of the most popular technical tools around.

The Relative strength Index  is measured on a scale from 0-100 with a reading above 70 being overbought and a reading below 30 being oversold. Originally he recommended a 14-day period as the setting but many other time periods have now become popular. Wilder discusses 5 uses of RSI in his book:

• Tops and Bottoms: they are indicated when the readings go above 70 (top) and below 30 (bottom)
• Chart Formations: the RSI may form chart formations that may or may not appear on the actual bar chart e.g. you might see a head and shoulders formation on the RSI but not on the bar chart.
• Failure Swings: When the RSI goes above 70 or below 30 this is a strong indication that the market is ready for a reversal.
• Support and Resistance:  sometimes a forming support or resistance can be spotted better in the RSI than  on the bar chart.
• Divergence: if price makes a new high or low and this is not confirmed by the RSI, this can be a very strong indication that a reversal is imminent.

I mostly use RSI to spot divergence. When the currency pair you are trading makes a new high and the RSI turns down that is bearish divergence. The opposite would be bullish divergence, which occurs when price makes a new low and the RSI turns up.

I also prefer to see divergence at major tops and bottoms. That is to say, if we have been in an up trend for some time and I am already thinking this might be topping and I see divergence then I am a lot more confident that it has in fact topped and vice versa.

I like to use RSI  in combination with other indicators to help build a picture. You will notice that in most cases of divergence the currency pair makes a low as does the RSI, then the RSI begins to turn up but the currency pair continues down. The same applies to highs.

Now the currecy pair makes a new low and the RSI does come down but not as low as the previous low and that is the point where action can be taken. The fact that the RSI has not dropped lower than its previous low and the price has, is the point of recognition.