MACD

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In technical analysis the MACD (Moving Average Convergence/Divergence) is a momentum indicator that shows the relationship between two moving averages.

The MACD is simple and reliable. It is calculated as a difference between the fast and slow moving averages. The most popular is the difference between a security's 26-day and 12-day Exponential Moving Averages (EMAs). MACD is a momentum oscillator and is plotted as a line that moves above and below zero line (center line).

By measuring the difference between two Exponential Moving Averages (EMAs), MACD can be positive or negative. A positive MACD indicates that the fast EMA is trading above the slow EMA, indicating a bullish period. A negative MACD indicates that the fast EMA is trading below the slow EMA, indicating a bearish period. When the faster moving average crosses the slower moving average - MACD crosses over centerline.

MACD could be used to generate signals from:

• Divergence
• Moving Average Crossover
• Centerline Crossover

MACD is based on the moving averages and is a lagging indicator. It follows the trend rather than predicting it. It is still a good indicator, yet, if it is does not react on the price trend's reversal then you may consider changing this indicator's bar period setting. This indicator's setting depends on volatility - the higher volatility, the smaller bar period setting is recommended. While it is easy to adjust MACD on the higher timeframes, it becomes more difficult to do it on the intraday charts, especially on 1-min bars where volatility could be rapidly changed several times per trading session.

Chart 1: MACD (Moving Average Convergence/Divergence)

The MACD-Histogram represents the difference between the MACD and its signals line (EMA). If the value of MACD is larger than the value of its EMA signal, then the value on the MACD-Histogram will be positive. Conversely, if the value of MACD is less than its EMA signal, then the value on the MACD-Histogram will be negative. The MACD histogram makes centerline crossovers and divergences more easily identifiable.

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