MACD (Moving Average Convergence/Divergence)

MACD (Moving Average Convergence/Divergence)

This oscillator is one of the most potent technical tools in the arsenal of many traders. The indicator is used to check strength and direction of a trend as well as to define reversal points.

The MACD histogram plots the difference between the 12-period and 26-period exponential MAs. If prices are going upward, 12-period MA will increase faster than 26-period EMA. The reversal will occur, if prices begin to fall. MACD has no bounds, but it has a zero mean, around which it tends to oscillate. The main trading principle is to sell when the MACD value reaches the positive area and buy when it turns to the negative area.

The MACD also contains the trigger line – 9-period exponential MA. It generates buy/sell signals when the MACD line crosses it from the upside or downside. The main flaw of the indicator is that MACD gives us these signals later than the price action itself. However, these signals are more trustworthy than the crossovers signal of the common MAs.

In addition, pay attention to convergence/divergence between the indicator and the price. Bearish convergence is formed, when the price sets lower lows, while the minimums of the MACD histogram get higher (buy signal). Bullish divergence is formed, when the price renews highs, while MACD maximums become lower (sell signal). 

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