CONCEPTS OF MACD
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MACD developed by Gerald Appel is the effective momentum indicator used to trade trends.
MACD typically used to identify overbought or oversold conditions showing relationship between two moving averages of prices.
MACD appears as two lines which oscillate without boundaries. The crossover of the two lines give trading signals similar to a two moving average system.
How this indicator works
MACD crossing above zero is considered bullish, while crossing below zero is bearish. Secondly, when MACD turns up from below zero it is considered bullish. When it turns down from above zero it is considered bearish.
The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" line is plotted on top of the MACD to show buy/sell opportunities.
The MACD proves most effective in wide-swinging trading markets. There are three popular ways to use the MACD: crossovers, overbought/oversold conditions, and divergences.
1. Crossovers - MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum.
2. Divergence - Security price diverges from the MACD, it signals the end of the current trend. A stock price that is rising and a MACD indicator that is falling could mean that the trend is about to end. Conversely, if a stock price is falling and the MACD is rising, it could mean that a bullish reversal could occur in the near-term. Traders often use divergence in conjunction with other indicators.
During trading ranges the MACD will whipsaw, with the fast line crossing back and forth across the signal line.
Divergence between the MACD and the price action is a stronger signal when it confirms the crossover signals.
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