The efficient market hypothesis stands in direct contrast to many of the tools that Forex traders use, including technical analysis methods. This theory states that market prices are not predictable because of the fact that asset prices fluctuate based upon consumer supply and demand. In other words, a currency cannot be traded above its natural progression levels for long periods of time because returns, on average, will be based upon the average market return. Any profits above this amount are based purely upon luck and cannot be sustained for long periods of time.
As we know, the efficient market hypothesis does not tell the whole story. Because market psychology is a large factor, it is possible to predict price movements, both with technical analysis and fundamental analysis. Technical tools like the MACD indicator can be used successfully because they track price changes and trends. These tools are so widely recognized as being effective that, even though they might be a self-fulfilling prophecy, they can be used to gain an edge in the currency trading place.
The MACD indicator is short for moving average convergence/divergence. This technical tool tracks trends in price changes on a moving basis, giving heavier weight to more recent price changes than prices that occurred in the past. Because this indicator is a lagging indicator, it is not as useful for erratically moving prices or currencies that are going through consolidation periods. Instead, the MACD lines are best for riding on the coattails of trends. They can also be used to predict when a trend is about to reverse itself.
Technical analysis methods should never be used by themselves, however. If you are trying to effectively predict price movements, one indicator is not enough. False signals occur all the time, so it is best to use the MACD indicator in conjunction with other indicators as well. Most people will use multiple technical indicators, but mixing the usage of the MACD with fundamental or sentimental methods is also extremely successful. Sentimental analysis is growing in popularity because it is so easy to learn. For example, a good area to watch over the last few weeks is the Euro. Thanks in part to advancements in solving Greece’s debt crisis, an astute sentimental trader could have made a lot of money as the Euro went up from about 1.32 to almost 1.35 in comparison to the U.S. dollar over the last several days.