Moving Average Convergence/Divergence (MACD)

MACD was originally developed by Gerald Appel in the 60s as a method for identifying changes in price trend. The indicator gives the trader a sense of change in momentum. It is a trend following momentum indicator that shows the relationship between two moving averages of prices.

Calculation:
The MACD is calculated by subtracting the value of a 26-day exponential moving average from a 12-day exponential moving average.

MACD = EMA[12] – EMA[26]

EMA = exponential moving average of the closing prices
[#] = the number of periods in the moving averages

Signal = SMA[9] of MACD

SMA = smoothed moving average
[#] = the number of periods in the moving average

How to Use MACD

1. Crossovers: When the MACD falls below the signal it is an indicator to sell and when it rises above the signal line it is an indicator to buy
2. Divergence: When the signal diverges from the MACD, it signals the end fo the current trend.
3. Dramatic Expansion: When the shorter moving average pulls away from the longer term moving average, it is a signal that the currency is overbought or oversold

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Tags: Calculation, Crossovers, Divergence, Dramatic Expansion